U.S. spending outlook is mixed

Is consumer tapped out? Experts disagree over what latest data portend

December 11, 2004|By Michael Oneal | Michael Oneal,CHICAGO TRIBUNE

For one shining moment in the pre-dawn hours of Nov. 26, all finally seemed right with the economy. Post-Thanksgiving shoppers were lining up to stampede the malls for $17 DVDs and $50 digital cameras. Hiring had improved, interest rates remained in check, and various measures of business activity were rising. Since then, however, the clouds have gathered.

Sales of general merchandise and autos have faded. Wal-Mart Stores Inc. has led a slew of big retailers in issuing tepid holiday outlooks. The October spike in hiring turned into a slump in November.

The latest numbers show that personal savings have dropped to their second-lowest level on record, raising serious questions about how much longer the nation's spending binge can last.

"The recent data look somewhat ominous," said Paul Kasriel, chief economist at Northern Trust in Chicago.

Despite the gloomy indicators, however, many economists remain optimistic that consumer spending - and the broader economy - will continue to chug along into 2005.

While consumers may be shifting into a lower gear as mortgage refinancing ebbs and the effects of tax cuts wane, improved hiring and business spending should pick up the slack, they say.

"I'm reasonably optimistic," said Wells Fargo chief economist Sung Won Sohn, who, like most of his peers, expects the Federal Reserve to boost short-term interest rates another quarter point Tuesday and to keep raising them cautiously into next year.

When it comes to holiday spending, several economists pointed out that online shopping and the increased use of gift certificates have changed traditional behavior, allowing for more last-minute purchases.

Data from the International Council of Shopping Centers show that in recent years, holiday sales tend to surge after Thanksgiving, fall off, and then surge again in late December.

"The lesson is not to get too worked up about the latest reports of weak retail sales," Goldman Sachs senior economist Edward F. McKelvey said in a note to clients this week.

That said, sky-high fuel prices are taking their toll on lower-income consumers, which helped lead to Wal-Mart's stumble in November when it chose to discount less than other retailers. And the near-record-low savings rates will make it more difficult for consumers to keep buying with abandon in the future.

But even given those headwinds, there are reasons to expect that spending will moderate, not grind to a halt, economists said.

First of all, fuel prices have eased substantially in recent weeks. That should make it easier to drive to the mall while freeing up cash for purchases that are more discretionary.

The jobs outlook should also help put a floor under spending. While it's true that the 112,000 jobs created in November disappointed economists, the three-month average of 178,000 jobs a month raises hopes that the labor market is on the mend.

"The job market is stronger than the headline number would suggest," said Sohn at Wells Fargo.

Many economists agree that consumers have developed a troubling habit of spending almost everything they earn. Tempted by easy money in the form of credit cards and low-interest loans, they have also loaded up on debt.

Buoyant stock and home prices have buttressed people's overall net worth. But both have been growing at red-hot rates, which many fear may be unsustainable.

"The longer that happens, the longer you wonder how long it can happen," said McKelvey at Goldman Sachs.

Erik Hurst, a macroeconomist at the University of Chicago Graduate School of Business, said that the danger of a low savings rate may be overstated.

He explained that the increased availability of credit cards and innovative forms of financing may allow people to comfortably buttress their personal finances with debt in a way they never could in the past.

That has inevitably led to increased personal bankruptcies. But there's just as much evidence that most people have enjoyed the flexibility responsibly.

"Can we overspend ourselves?" Hurst asks. "Yes. Is there any evidence of that? No."

The hope among economists is that growing incomes and more jobs will allow consumers to gradually rebuild their personal balance sheets. That would put pressure on consumer spending. But if the deceleration is orderly, increased business spending could make up the difference as companies tap their rich profits.

The wild card, said Kasriel, is interest rates. He points out that even as the average cost of money has moved down in recent years, the level of total debt payments is still high by historical standards.

That means people have taken on more loans to buy things like houses, cars and imported luxury goods, rather than use the low rate environment to shore up their finances.

As rates rise, that could cause problems. Stephen Roach, the chief global economist at Morgan Stanley, insisted this week that ever-accelerating home prices have created a bubble reminiscent of the stock market in 2000.

That's an extreme view, but a 13 percent surge in home prices during the third quarter, versus 9.8 percent in the second, does suggest that the market could be overheated.

The Chicago Tribune is a Tribune Publishing newspaper.

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