War victory doesn't free consumers Confident Americans not spending recession away. WAR IN THE GULF

May 06, 1991|By New York Times

WASHINGTON -- With surveys showing a sharp rebound in consumer confidence after the Persian Gulf war, one might assume that it would not be long before the economy itself started to pull out of recession.

The nation's households, after all, account for two-thirds of economic activity -- half of this at retail counters and half in paying for things like sailing lessons, subway tokens, boarding-school tuition and the monthly mortgage.

But the improvement in consumer psychology, now ebbing a bit, is not quickly translating into a spending surge, for reasons ranging from debt to demography.

An obviously concerned Federal Reserve moved last Tuesday to spur the economy by making another round of cuts in interest rates.

Right now, the consumer sector "is the only place that you could get a significant demand gain that could pull the economy out of decline," says Richard D. Rippe, chief economist at Dean Witter Reynolds.

One reason consumers loom so large is that they are responsible for a bigger-than-usual share of the contraction in the current recession.

Another is that there does not seem much likelihood of getting such a boost elsewhere, either from spending by government or from the stimulus of business investment or exports, both of which show signs of faltering.

The main problem seems to be that the consumer, like the nation President Bush described at his inauguration, may well have more will than wallet.

There are various possible explanations for this situation, some of them at variance with what consumers sometimes tell pollsters, some not seeming to square with one or another set of figures.

One prominent theory, ostensibly supported by daily headlines as well as anecdotal evidence, is that American society, from the federal government to the ordinary worker, is overwhelmed with debt. Companies default on bonds, individuals in record numbers resort to bankruptcy, and ever-fewer states command triple-A credit ratings.

Another explanation for at least part of the reduced consumer spending is that the baby-boom generation has entered middle age and, with houses furnished and college expenses looming, is realizing that the time has come to cut out the $100 designer jeans and other extravagances. Perhaps this shift will show up before long in higher savings rates.

But the dominant view is that the consumer is mainly restrained not by debt or demographics but by shrunken income -- a painful inability, after inflation and taxes, to make ends meet.

Last summer, real disposable personal income turned negative and then accelerated during the autumn quarter to a 3.5 percent rate of decline. Last month, the government reported some moderation in the slide, to a rate of 1.6 percent.

Susan M. Sterne, president of Economic Analysis Associates in Stowe, Vt., called these figures dismal. She noted that recessions typically bring tax cuts but that this time taxes, mainly excise taxes, have been raised.

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