U.S. consumer spending spree enjoys 14th year defying experts

August 07, 2005|By Jay Hancock

EINSTEIN, it turns out, was wrong. There are two constants in the universe: the speed of light and the rising tide of dollars coming from the American consumer's wallet.

Through booms, busts and disasters, for more than a decade, U.S. stores have booked successively higher sales. Today's eighth-graders have never known a day when the American shopper was not standing guard against the forces of recession and paid-off credit cards.

The last time retail spending faltered, even for a few months, was the fourth quarter of 1991, when layoffs and consumer confidence got so bad that President George H.W. Bush had to admit that "many families are having a rough go of it," according to news reports.

Since then there have been 54 consecutive quarters of consumer spending growth, a streak that is starting to rival the length of Cal Ripken's consecutive-games streak. (It'll be 14 years for shoppers if they get through 2005.) In a report last week, Merrill Lynch economist David Rosenberg called it a "spending spree" that is "unprecedented" in the economic annals.

Shoppers sallied forth again in the second quarter. Driven in part by "employee pricing" deals from car sellers, inflation-adjusted consumer spending rose at an annual rate of 3.3 percent for the three months. Not awesome. But not shabby, and again defying expectations.

Businesses had cut production because they thought $60 oil would slow consumers down. Instead, shoppers cleaned the shelves, so much so that analysts expect companies to have to rebuild inventory this quarter.

Expensive energy is only one of many shocks and threats that have failed to reverse retail sales since 1991. Rising interest rates, crises in developing markets and terrorist attacks haven't done the job. The quarter after the attacks of Sept. 11, 2001, Americans increased spending at a 7 percent annual rate, the biggest increase since Ronald Reagan was president.

Even a full-blown economic recession in the middle of 2001 wasn't enough to stop spending, and that almost never happens.

"It seems to me the lesson of this last cycle is: We spend," says Bill Cheney, chief economist for John Hancock Financial Services in Boston. "We spend through thick and thin. Obviously we slow down when we have millions of job losses, but even in that context consumer spending kept growing."

For years financial media have emphasized that consumers are important because they account for two-thirds of the economy. Well, that's wrong. These days, partly because of lagging business investment, consumers are 70 percent of the economy.

True, shopper firepower is often aimed overseas, boosting imports and threatening American factory jobs. But the economy is better off with consumers in full, indiscriminate acquisition mode, bringing home Malaysian TVs along with American washing machines, than with them substantially shutting down.

The consumer streak has not stopped prognosticators from worrying about a reversal. Perhaps it has encouraged them. "Even the Energizer Bunny runs out of batteries eventually," Merrill Lynch's Rosenberg wrote last week, although he says via e-mail that he expects the housing boom to aid consumer spending through the fourth quarter.

Rising home prices are merely the latest "one-time" stimulant that many seers believe will leave shoppers flat once it fades. People are getting home-equity lines and spending the appreciating value of their property, the theory goes, even as they're hocked to the haunches with stagnating incomes. Once home prices level off or fall, look out!

But it was ever thus. If the disappearance of $8 trillion in stock market wealth between 2000 and 2002 couldn't stop the customer, what can? Predictions of retail disaster have been based forever on stagnant worker pay, ever-rising debt levels and miserable savings rates that supposedly leave consumer tanks dry.

But the savings figures are badly inaccurate; they don't measure capital gains, pension distributions or household debt amortization. Yes, debt has soared, but household interest payments have not: Rates are lower! And the government's huge tax receipts this year suggest wages and salaries may finally be growing faster.

Come to think of it, maybe there are three universal constants: the speed of light, consumer spending and the people who think consumers are about to hit a wall.

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