Consuming crisis

March 08, 2003

SEPT. 11. Osama bin Laden, the Taliban and war in Afghanistan.

Dow plummets. Enron, WorldCom and so on. Rising unemployment and crashing 401(k)s.

Orange alerts. Saddam, again. Plus, North Korean nukes.

Dow plunges. Gas masks - and duct tape. Way too much snow. Gas hits $2 a gallon in California, $3 in some spots.

And now a likely war in Iraq.

Yet through all these ugly months, American consumers have held their heads high and kept doing what we do best: We shopped - we bought more shoes, new kitchens and big SUVs - even if we had to burn up gains in our homes' values by spending the proceeds from a tidal wave of refinancings.

In recent decades, American consumers have almost always been the heroes of downturns, collectively sustaining the national and, to an increasing extent, world economies. This time around, we've been riding the strong tailwind of the lowest interest rates in 40 years, down to absolute zero for many cars and big-ticket items. And with rock-bottom mortgage refinancing, consumers' credit-card payments as a share of their income have hardly grown - as close to a free lunch as might be found.

But now the limits of our instinct for consumption are being tested, and American shoppers may finally have had enough, at least temporarily.

Of course, many readers are doubtless now looking over at that new sofa or their kids' braces and thinking to themselves: not at my house. But many retailers had a lousy Christmas, consumer spending was down in January and, as we gird ourselves for a likely war in Iraq, signs mount of a retreat on the homefront.

On the latest Conference Board national survey, Americans' confidence in the job market fell sharply to the lowest reading in almost 10 years. The University of Michigan's consumer sentiment index has similarly sunk.

A retreat makes perfect sense. The nation's in a terrible slump, having lost more than 2 million jobs in just the last two years. The stock market's down about 45 percent the last three years. The already tired joke about 401(k)s having been turned into 301(k)s, now substitutes 201(k)s in the punchline. Investors are caving, yanking $27 billion from domestic stock funds last year and continuing their withdrawals in January. Newsweek runs a cover story on "Anxiety and Your Brain," and we know why.

On battered Wall Street, where hope eternally battles fear, the long-received contrarian wisdom is that such dark times often provide perfect opportunities to profit. As one of the Rothschilds supposedly proclaimed long ago: "When the streets of Paris are running with blood, I buy."

We fear this stock-trading theory may soon be put to a very real test.

The outcome of blood in the streets of Baghdad is just as uncertain for America's economy as it is for world politics. Even the rosiest of expectations - decisive military and political victories leading to a long-awaited domestic economic recovery - could put consumers in a new bind.

A healthy recovery may well not mean job growth. Meanwhile, the cost of the war and its aftermath, oil-supply dislocations and reinvigorated consumer demand could mean sharply higher interest rates, followed by the double whammy of higher prices and an end to the flow of cash from mortgage refinancing. So even after this seemingly endless string of bad news - from Sept. 11 to Baghdad - good news may carry its own price.

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