Consumers May Begin to Feel the Pain
Commentary. Art Pine is a columnist for Bloomberg News. The opinions expressed
are his own.
By Art Pine
Washington, April 16 (Bloomberg) -- One of the most critical uncertainties
about the U.S. economy is how much consumers will pull in their horns. Until
now, they've been keeping the economy afloat. If they suddenly retrench, a
recession may be inevitable.
So far, they've been defying all the odds -- and the forecasts. Stock prices
plunged during the first quarter of this year, and company job-cut
announcements proliferated, yet consumer spending rose, probably at a 3.5
percent annual rate.
``There's a mixed message out there,'' said Edward Sarpolus of EPIC/MRA, a
Michigan polling firm. Even in Rust Belt states, he said, ``the public's not
ready to jump off the 100-story building. They're not ready to say there's a
recession.''
Now, two new factors have entered the mix that economists say could well test
that assessment -- and decide how deep the slump is likely to be. First, the
economy has actually begun losing jobs. Second, household wealth has fallen
dramatically.
The change in the job picture could have the most visible impact. While
so-called layoff announcements have been legion in recent months, they haven't
hit home to consumers. Many jobs are eliminated by attrition. Some job cuts
never actually happen.
This time it's different, because the statistics represent genuine job losses.
The economy lost 86,000 jobs in March. The number of workers filing new claims
for jobless benefits has been rising rapidly each week. It's now 49.6 percent
above a year ago.
Consumer Wealth Plunges
That means that the unemployment rate -- now 4.3 percent of the workforce, up
from 4.2 percent a month ago -- is likely to start rising more rapidly,
economists say, heightening anxiety about the economic outlook, and prompting
consumers to hold back.
``This could be deadly, because when you start seeing actual drops in
employment, people get really scared that they could be next,'' said David
Wyss, chief economist for Standard and Poor's in New York. ``This could turn
into a real recession.''
The plunge in net household wealth also is worrisome. For months, economists
have been debating the likely impact of the ``wealth effect.'' If the bull
market was such a major factor in fueling the boom, will the bear market spawn
a recession?
Wealth-effect theorists warned that such a ``reverse wealth effect'' would have
a major impact on consumer spending. Plunging stock prices will make everyone
feel poorer, they contend. So many Americans own stock now that the effect
could be enormous.
Until now, however, the evidence has been difficult to find - - in part because
real estate values have continued rising, giving consumers a ready source of
capital by refinancing their home mortgages. Borrowing and credit-card use also
shot up.
Last quarter, however, real net consumer wealth dove to a level some 11 percent
below that of a year ago -- the biggest deterioration since the oil-shock
recession of 1973-1975 -- says Ian Morris, chief U.S. economist for HSBC bank
in New York.
Scary Drop
``When household assets decline, consumers cut back on the growth of their
liabilities,'' Morris said. ``Most are mortgages, which is then likely to hurt
housing -- the last pillar of strength'' in the economy. ``It's a pretty scary
drop.''
To be sure, there's still enough uncertainty for the pessimists to end up
mistaken. If the economy picks up soon -- as Federal Reserve officials
currently are predicting -- the mood among consumers could brighten quickly.
Fears about the ``reverse wealth effect'' also may prove overdone, says James
A. Bianco, head of Bianco Research LLP in Barrington, Ill. He has a different
view: The reverse wealth effect is real, but it's run its course. The danger is
over.
No Further Market Slides
As Bianco figures it, while the stock-market slide of the past year has been
horrific, the bulk of it has been in stocks of computer-related and
telecommunications companies. Some 277 of the Standard and Poor's 500 stocks
are higher than a year ago.
Bianco concedes that since the computer-related stocks caused the wealth effect
in the first place, the movement of the Nasdaq Composite Index over the past 13
months should have almost as big an impact on the way down.
He's betting, however, that because Nasdaq stocks already have fallen so far,
the danger has passed. The market slide hasn't prompted consumers to cut back
so far, and isn't apt to from now on because it's unlikely to go any further.
Stock prices of companies in other, more traditional industries are holding
their own, he says, and Nasdaq investors aren't likely to sell a
once-high-priced stock that currently is worth only $10 because, they figure,
it can only go up.
``The whole (Nasdaq) sector has become a giant lottery ticket,'' he said.
Neither the job picture nor the wealth-effect issue is simple, of course. If
the economy stabilizes, employers may decide to hang on to their workers a
little longer, on grounds that the labor market still is tight and help is hard
to find.
Consumer sentiment fell during February, only to rebound in March without
affecting consumer spending. Last Thursday, the University of Michigan's index
of consumer sentiment showed that Americans are becoming more pessimistic about
the coming months.
``This is where the rubber meets the road'' in determining where the economy
goes from now on, said S&P's Wyss. ``Until now, there have been signs of a
slowdown, not a recession. Now, it's begun really hitting people.''
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