October 3, 2001
For the past decade, consumer sentiment remained unusually high, and so did their spending. On an index that assumed the 1987-1989 period was a normal 100, sentiment has averaged well above 120 and even sustained readings above 130 during the stock market bubble period of 1999 and early 2000.
Not surprisingly, consumer spending also was surprisingly high. With an economy growing 3.7 percent after inflation, consumer spending was surging 4.6 percent per year for the decade. These strong spending patterns undoubtedly contributed to the low unemployment in the past few years.
With only a few responses from after the September 11 tragedy, the latest consumer sentiment measure was only slightly above 95. Further erosion is almost certain when the next survey is released.
Hopefully, confidence will be restored in the months ahead. Nevertheless, the last major prop under this economy, consumer spending, is weakening as the important holiday season approaches. Even an average Christmas selling season may be out of the question now.
This does not mean that sales will continue to erode through the fall. Sales plunged after the attacks. Auto sales appear to have fallen to 13.3 million annualized units for a couple of weeks. A rebound to nearly 16 million should be expected.
Chain store sales were below previous year levels in mid-September. They are returning to 1-2 percent positive gains for stores open more than a year. Nevertheless, mall traffic remains 7-8 percent below previous year levels and that 16 million auto selling rate is well below the 16.6 million average so far this year.
What these indicators suggest is that consumer spending may be under 3 percent growth, at least for the next twelve months. That may be enough to pull us out of recession, but not enough to restore the economy to health.
As the implications of this lost consumer confidence ( and reduced spending capacity as a result of debt accumulation in recent years) are becoming known, some members of Congress are seeking means of jump-starting the economy.
Not surprisingly, many wish list ideas are being proposed now that a slow economy raises prospects that they might be considered. This in no way means that these proposals are right for current economic conditions.
For example, some have proposed a temporary reduction in the capital gains tax "to encourage investors to buy stocks." In fact, the proposal does just the opposite. By lowering the cost of cashing in on accumulated capital gains, the tax cut encourages selling. This would be accentuated if investors believed the opportunities for lower taxes were only temporary.
Congress also is considering a tax cut for businesses. Perhaps those burdens are too high, causing American goods to be less competitive than goods produced abroad because of the tax costs. That is an issue for another time.
However, businesses that do not have taxable income, and many now are in that camp, will probably be harmed by the higher interest rates required as government replaces that lost tax revenue with government bonds. Congress must get off the assumption that tax cuts are costless. If they really were, why have any taxes at all?
Other proposals are to accelerate the tax reductions contained in the recently passed tax bill. And the wish list goes on and on.
When consumers spending was growing faster than their incomes, the federal government was shifting from large deficits to large surpluses. We privatized a larger portion of our economy, with good results.
Unfortunately, we were not as secure as we thought. More now needs to be spent in the public arena to regain domestic tranquility. Thus, government spending will rise and deficits may reappear. We might have some timing problems as consumers retrench before government spending surges.
The need to jump start this economy already is being addressed by surging government contracts and enormous financial liquidity. An upturn will appear soon regardless of what Congress does on taxes. To avoid too much pressure on long term interest rates, which already are beginning to rise, Congress should curb its urge to do something.
Rising government will offset slowing consumer growth. Nothing more may be needed.