Person of the Week: The American Consumer

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FRANCIS MILLER/TIMEPIX

Go ahead: Give us one more buy

As the weakest U.S. economy in a decade limps into fall, there’s at least one American consumer that economists won’t have to worry about: Pittsburgh resident Kathleen Kearney, who had her country in mind Thursday when she claimed $73.7 million in Powerball winnings. "I guess we'll help the economy somewhat," she said.

These days, Kearney may be the only one. Tuesday, the Conference Board reported that its August consumer confidence index took a dive for the second straight month, reflecting new fears about the job market. And Thursday, the Commerce Department struck with the news that consumer spending rose by only 0.1 percent in July, down from an already anemic 0.5 percent in June. Both reports sparked triple-digit Dow selloffs on Wall Street, with Thursday’s pushing the index below 10,000 for the first time since April.

Please, please, please keep spending

There’s more than share prices riding on the consumer's wallet. Back in January, when Alan Greenspan officially put the nation on recession watch with the first of many interest-rate cuts, the recovery scenario was simple. Helped by Fed easing, businesses would need till the end of summer at the latest to deal with their post-bubble hangover by cutting production and payrolls; until then, American consumers — who make up two-thirds of U.S. economic activity — would have to carry us through.

They did it in the first quarter of the year, propping up GDP growth to 1.7 percent almost single-handedly. They did it in the second quarter, when GDP growth slipped to 0.2 percent — only a stronger-than-expected 2.5 percent boost in consumer spending kept overall growth from tipping into negative territory and setting off the recession bells anew. They’ve done it all year, shopping resolutely even as cost-cutting companies have announced nearly 1 million layoffs thus far in 2001. And they've been doing it even as they slide ever deeper into personal debt.

That spree has been thus far made possible by the economy's one strong spot, housing; rampant mortgage refinancing at lower long-term interest rates (and higher home valuations) has helped consumers restructure their debt and come out ahead a few hundred a month in spending money. But that boom is deflating too, and that extra money will go straight under the mattress if the homeowner starts to worry about his job. (Bad news: announced layoffs hit an eight-year record of 205,975 in July, and the number of people on unemployment rose again last week to 3.17 million, the highest since September 1992. These are the headlines that try shoppers’ souls.)

Now summer is over, and this economy needs its consumers more than ever. Business investment is still in precipitous decline. Inventory reduction may still have a long way to go. And the Fed is now seven rate cuts deep without having had any appreciable effect on either businesses’ outlook or their stock prices. And the question on everyone’s lips, from Wall Street to the White House, is: Can consumers keep it up?

Your president needs you

George W. Bush certainly hopes so. The $100 million in tax rebates that hit mailboxes in August haven’t had time yet to show up in those lagging economic reports, and most economists expect that extra $300 in every wallet to find its way back into the economy as the fall progresses. His political future — not to mention that of his Republican compatriots in Congress — may be riding on it, as Bush’s father can attest. In Washington, it’s still the economy, stupid, and if consumers ever stop spending we’ll be in a recession by Thanksgiving.

Most economic forecasters still see a recovery "in train." Inventory reductions and job cuts will run their course eventually, and that crucial resurgence in capital investment will inevitably follow. But nobody’s calling it before the spring, and between now and then forecasters will be looking anxiously at unemployment reports to see when and if John Q. Consumer just gets too nervous about his paycheck to keep spending Saturdays with his credit card.

Retailers, after getting burned by the slowdown’s front end last December and spending this year chasing customers with profit-raiding discounts, aren’t taking any chances that shoppers will last long enough to come through for them this time around. Many stores are frantically deferring orders and paring offerings in anticipation of an even worse Christmas shopping season than last year — perhaps the weakest since, well, the last recession. "I think the full effect of these layoff announcements will take effect in the second half," PricewaterhouseCoopers senior retail economist Frank Badillo told the Wall Street Journal. Leaving the American consumer either too scared or too jobless to keep whistling past the graveyard and directly to the mall.

Kathleen Kearney, we need you.