What would happen if Americans decided to spend less? Last week's decline in stock market sent shiver through economy

The outlook

August 09, 1998|By J. Leffall

AMERICANS continue to increase spending. Last week the Commerce Department reported that personal spending surged 0.6 percent, outpacing the 0.2 percent growth in personal income and reducing the savings rate to the lowest level since the government began keeping statistics in 1959. Will Americans keep buying more, even as signs mount that the economy is slowing? What would be the consequences of a spending slowdown?

Tom Carpenter

Chief economist, managing director, ASB Capital Management, Washington

In light of second-quarter GDP numbers that we've been getting the past few weeks, along with other data, what we really see is a savings rate that as of late has gone to zero. Consumer spending, conversely, has risen roughly 5 percent in each of the last two quarters. The effects of that are things that may not be sustained going forward.

One key thing to focus on is that consumer spending has been tightly linked to performance in the stock market. Consumer spending will slow because of the trends in the market. Consumer spending, by the way, is two-thirds of our economy and was one of the only support mechanisms during these last two quarters. As spending drops, our economy will not actually drop but just decelerate quite rapidly. There will be a retrenchment of spending, tied to the heels of performances in the stock market.

This economic growth we've been experiencing is really old. We've really been growing since 1982 -- forget about 1990 and 1991 when Iraq invaded Kuwait; that was merely a blip. We've essentially had 16 straight years of growth and we are about due for a correction. What's kept things going is low interest rates, which in turn aids in the purchasing of durable goods. But in the short term, Asia will get worse before it gets better, and in turn there will be a macro-economic slowdown.

Cynthia Latta

I= Principal United States economist, Standard & Poor's/DRI,

Lexington, Mass.

In any situation, consumers sustain the economy; otherwise there would be very little need for production. So if consumer confidence should take a dip, it would certainly be shown in the overall economy.

It's very rare that consumers stop spending completely and consumers themselves cannot actually trigger a recession either. If the stock market slides more, we will see consumer spending slow down but not stop.

Consumers don't cause economic downturns; they react to them. They can stimulate the economy by buying more or they can panic and make it worse.

If consumer spending drops, the growth percentages will go from 5 and 6 percent to near 1 percent. The growth will decrease, not the spending itself.

The diagnosis is that inventory corrections and continued fallout from Asia, which continues to be a thorn in the market's side, will cause the markets to dip or go unchanged. If people are concerned about jobs, then that's another thing. They will lock up tight when employment is on the line.

Robert Sweet

Chief Economist, Allied Investment Advisors

I think the stock market and the Asian situation are going to have an impact as far as consumers are concerned because inflation is virtually nonexistent. Because of that, consumers will be willing to spend. The high inventory situation got heavy in the first quarter, but that should be corrected by year's end.

Speaking of year's end, the holiday season will be crucial. The consumer is extremely important in making that work. Numbers here are a little bit tainted because of the GM strike. General Motors accounts for 1 percent of our economy. It may not seem like much, but when one of the world's largest companies goes on strike, you feel it.

I think the consumer might temporarily be cautious and get tight with the wallet a little bit before back-to-school season, which we expect to be good this year.

I don't think the savings rate that consumers are getting on savings bonds or money market accounts is that good, so the incentive to save isn't that good. Moreover, a lot of consumers have 401(k) plans, and that is a substitute for savings. What we have to realize here is that the United States has historically been consumer-oriented and low in savings anyway, especially compared to countries in Europe. And lately the consumer, because of the market being up, has felt richer so the consumer will spend more. Right now we are seeing a slight correction, but we will bounce back.

Mickey D. Levy

Chief Economist NationsBank/Montgomery Securities, New York

Certainly a rise in household savings, associated with a moderation in consumption growth, would invoke a slowdown in economic growth. That might not be so bad if we stick to fundamentals.

If you look at the fundamental reasons behind consumption, i.e., low interest rates and mortgage rates, there is no reason that consumer spending will just stop. Consumption growth is still on all cylinders. You have a healthy growth of disposable income with all of the prosperity. Given all of the prosperity, a lack of consumer spending will not devastate the economy, but there will be market corrections and moderation in consumer spending with growth rates slowing down a little. It all depends on the individual.

Pub Date: 8/09/98

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