Consumers' Last Hurrah?

Let us contemplate and celebrate the true heroes of the economy--American consumers. Uncowed by terrorism and decimated stock prices, these stalwarts of the mall have combated economic stagnation here and, through imports, abroad. The question now is whether consumers have exhausted themselves and are about to fold. If they do, the economic outlook is dismal. Some bad omens:

Retail sales are weakening. Even Wal-Mart, which has benefited as shoppers searched for savings, has had a slowdown. For much of 2002, its sales rose 5 percent to 6 percent at stores open at least a year. In September, the gain was 3.3 percent; many other chains did much worse.

Confidence is falling. In October, the University of Michigan's Index of Consumer Sentiment dropped to 80.6, its lowest level since 1993. The share of households reporting their financial situations had weakened was the highest in a decade.

Consumer credit growth may be slowing. In August, it increased at a 2.9 percent annual rate; earlier in the year, the rate was 5.9 percent. Lenders may fear losses and borrowers may feel overcommitted--or both.

"Consumers are thinking of packing it in," says Mark Zandi of This would be devastating, because consumer spending and home building represent nearly 75 percent of the economy (gross domestic product), and everything else is weak. Since late 2000, business investment has continuously declined. There are already too many empty offices and surplus factories. Higher federal government spending is diluted by weak state and local spending. Exports lag, because foreign economies lag. "The key is jobs," says Zandi. "If businesses hold the line on payrolls"--don't fire more workers--"then consumers have enough cash flow, and credit is cheap enough, to get us through without a double-dip [recession]."

The threats to consumers--aside from jobs--are obvious. One is the stock market. This year, it has lost $2.7 trillion in value (through Oct. 25), says Wilshire Associates. As consumers feel poorer, they may save more and spend less. Another threat is debt. In June, consumers devoted 14 percent of their disposable income to debt service, including mortgage interest and principal. That was down only slightly from the record 14.4 percent in late 2001. Credit-card delinquencies at banks--payments 30 days or more overdue--are now at a near-record 3.91 percent, says the American Bankers Association. Sears recently took a $222 million charge against future credit losses and is tightening lending standards.

Still, most forecasters think solid consumer spending will sustain economic recovery. They could be right for three reasons. First, shoppers have become highly price-conscious. People shop closer to holidays (Halloween, Christmas) to get the biggest discounts. Monthly sales data may be less reliable, because spending is more bunched. This may not help retailers--whose prices and profits are squeezed--but it can sustain production, notes Marc Levinson of JPMorgan Securities.

Second, low interest rates remain a huge economic narcotic. Mortgage refinancings have been a windfall. Homeowners have reduced monthly payments or borrowed more against higher housing values. For 2002, Zandi estimates that such "cash out" refinancings and new home-equity loans will total a staggering $269 billion. The auto story is similar. In August, rates on new loans from auto-finance companies averaged 2 percent, and the typical balance was $26,200, which was 96 percent of the purchase price. In 1999, rates averaged 6.7 percent on $19,900, or 92 percent. Cheap credit is one reason General Motors expects industry sales to remain fairly strong in 2003, says Paul Ballew, GM's chief market analyst. GM forecasts sales of 16.5 million units next year compared with 17 million in 2002.

Finally, consumers may be financially stronger than was thought. In the late 1990s, people saved less and spent more, apparently relying on higher stock-market and housing wealth. This suggested that, if stocks dropped, the pattern would reverse--saving would rise, spending fall. People would replenish savings. Government figures implied a dramatic reversal in spending, because the personal savings rate (savings as a share of disposable income) virtually disappeared: it was reported at about 0 for 1998 and 2000, 2.4 percent for 1999 and 1.6 percent for 2001. By contrast, the 1990-95 average was about 7 percent. But the figures have now been revised up (to 4.7 percent for 1998, 2.6 percent for 1999, 2.8 percent for 2000 and 2.3 percent for 2001). This implies that any shift from spending to saving may be less dramatic and disruptive.

Although Americans love to shop, there are limits. Even GM, fairly optimistic, thinks consumer spending will rise only 2 percent in 2003, down from 3 percent this year. There are imponderables: a war in Iraq; further interest-rate cuts from the Federal Reserve; a new government "stimulus" plan. But have the powers of American materialism and cheap credit finally spent themselves? No one really knows, but on the answer hangs a great deal--economically, perhaps everything.