After years of good times, worries about economy grow

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Saturday, December 02, 2000, 10:00 p.m. Pacific

After years of good times, worries about economy grow

by David Leonhardt The New York Times Americans are buying less jewelry and fewer homes than they did a year ago. Personal computers are gathering dust on warehouse shelves. Sales of airplane tickets and minivans have flattened in recent weeks.

Just as the country has entered the most important shopping season of the year, consumers are holding back, reacting to a lower stock market and higher energy costs and interest rates. At the moment, the prospects for next year do not seem much better. The enthusiasm of American consumers for spending and borrowing, which has sustained the economy whenever it seemed to falter over the past decade, now appears to be at its lowest point in perhaps five years, economists say.

Of course, those five years have been among the strongest in history, and the economy continues to grow today at a rate that would have seemed healthy at other times during the past three decades. Most economists still believe the United States is unlikely to enter a recession in the next 12 months, even if the odds have risen lately.

The economy, said Bruce Steinberg, the chief economist at Merrill Lynch, has gone "from great to good, or maybe great to OK."

The shift has happened more quickly than many analysts expected, however, and it has been particularly evident in the past week. For the second consecutive month, consumers said they were less confident about the future of the economy, the Conference Board reported Tuesday. On Thursday, the government said the number of workers filing new claims for unemployment benefits rose 5 percent in just one week. The Standard & Poor's 500-stock index hit a 52-week low last week, as did the Nasdaq composite index, which has lost almost half of its value since March. Consumer debt has reached its highest level in at least 20 years, according to one measure.

All of this comes on top of the third quarter, when economic growth was less than half that of the previous three months.

"We're seeing a deterioration in economic growth that is much sharper than expected," said Jerry Jasinowski, president of the National Association of Manufacturers.

At the heart of the deterioration is a newfound hesitance among many consumers. That skittishness is of particular concern because the other pillar of the 10-year economic expansion - business investment in new plants and equipment - has also weakened.

The first consumers to change their behavior were lower- and middle-income Americans, who have been most affected by the rise in energy costs over the past year and a half, economists said.

"I've definitely had more expenses this year," said Karen Guerette, a single mother in Aurora, Colo., who was shopping with a friend at a Denver mall last week. Both were looking for bargains. Guerette's friend, June McClain, chose a set of linens on sale and perfume for her 25-year-old daughter that came with a free gift.

"I am probably spending less this Christmas than I did last year," said McClain, a baker. "You have to do a lot of comparison shopping."

In recent months, the spending slowdown has begun spreading to wealthier consumers, many of whom have watched their soaring stock portfolios lose momentum and start falling.

High-end housing prices in some cities are leveling off or even starting to fall. In New York, Manhattan apartment costs continued to rocket upward in the earlier this year, but seem not to have changed much since the spring, say real-estate agents. On the West Side of Los Angeles, fewer homes have sold for between $500,000 and $2 million recently than in the past, said Tom Dunlap, branch manager at Prudential John Aaroe, a Beverly Hills brokerage.

"People are looking very closely at values," Dunlap said.

As a result, many companies, in a wide variety of industries, are expecting significantly slower growth in the coming months. "We have seen a slowdown," said Kim Shreckengost, a vice president in Home Depot's office of the chief executive. For Home Depot, the slowdown began in the third quarter - when sales in existing stores rose 4 percent, compared with a 10 percent gain a year earlier - and has continued in recent weeks. The average customer purchase has not slipped, Shreckengost added, but fewer people are making it to the cash register.

Across Corporate America, the story is similar: By traditional standards, sales remain strong, but recently they have fallen more quickly than executives had expected. For example, with fewer people buying minivans and the growth of sport-utility vehicles slowing, auto sales fell 3.5 percent last month, compared with a year earlier, carmakers said Friday. But 2001 will still likely be one of the best in the industry's history, said Emily Kolinsky, an economist at Ford Motor.

The number of people boarding airplanes has stopped growing in recent months, and over the past three months airlines have halted a string of fare increases for leisure travelers, raising prices only on corporate fares. Still, the percentage of seats filled this year will be higher than in any year since 1947, said Michael Linenberg, an analyst at Merrill Lynch.

And home sales are likely to decline this year for the first time since 1995, but almost 50 percent more people will have bought houses in 2000 than did in 1992, said Mark Vitner, an economist at First Union in Charlotte, N.C.

To be sure, many consumers say they continue to feel flush because of wage increases of the past four years and long-term stock market gains.

Jeffrey Rand, 51, a building contractor in South Burlington, Vt., said he bought a full-size truck two months ago, upgrading from a smaller version, largely because he remains confident that his income will stay near its current level. "I'm a little nervous" about the recent economic news, said Rand, shopping last week at a mall in Boston, "but it hasn't dramatically affected my mood yet."

John Watkins, a 33-year-old computer programmer from Arlington, Texas, who was shopping in the same mall, said his stock holdings had dropped about 40 percent this year, but that he had not changed his buying habits. His investment portfolio is still up. "I'm not planning on doing anything with that money for 20 or 30 years," he said.

Still, economists say a moderation of consumer spending had to happen at some point because higher costs have left many people with less disposable income than in the past.

Since the middle of 1999, gas prices have jumped almost 50 percent, health-care costs are up and the Federal Reserve, hoping to slow the economy, has raised interest rates six times.

For much of the past 18 months, the added expenses failed to curtail shopping, as consumers took out more debt and dipped into their savings. In the third quarter, the average minimum monthly payment that Americans owed on their debt reached its highest level since 1987. Americans also spent more money than they earned during the quarter, something that never occurred in the 1980s or 1990s, according to Economy.com, a consulting firm in West Chester, Pa.

Now people seem to be reacting. In recent weeks, sales of personal computers have actually fallen below their level a year ago; Gateway said its revenue over the recent Thanksgiving holiday was almost one-third lower than during the same weekend in 1999.

Overall, Americans' consumption of products and services was virtually flat in October, after increasing rapidly over the summer.

Marnie Ross, a 35-year-old mother of five boys between 1 and 15, said she goes to the predawn toy-store sales in Albuquerque, N.M., every year during Thanksgiving weekend. This year, though, to afford the Star Wars figurines and Etch-a-Sketch she bought, she and her husband postponed a family vacation. "We're getting away from too much on credit," Ross said, "and staying in budget."

Some upper-end consumers seem to be making similar compromises. Two years ago, about 21 percent of consumers said they planned to buy jewelry as a holiday gift, according to America's Research Group, a marketing company in Charleston, S.C., that regularly interviews 1,000 consumers. Last year, the portion rose to 27 percent.

But since August, equity markets in the United States have lost almost $2 trillion in value, and those losses now appear to be hurting sales of luxury items, from watches to sport-utility vehicles. Last month, only 18 percent of people surveyed said they planned to buy jewelry as a gift this year, according to America's Research Group.

"Consumers are certainly reining in their most hedonistic impulses very quickly," said Mark Zandi, the chief economist at Economy.com.

Luxury chains, which reaped some of the biggest benefits of the decadelong wealth explosion, are now experiencing a slowing of growth. After more than a year of double-digit gains, for example, sales in existing Neiman Marcus stores dropped 2.5 percent last month, compared with November 1999, according to Goldman, Sachs.

"Neiman was the last holdout," said George Strachan, a Goldman analyst, noting that most segments had already suffered from weaker sales since the middle of the year. "There are only a handful of companies that are really doing well."

If the current trends continue, many economists think the Federal Reserve may switch courses and lower interest rates sometime in the next four months to prevent growth from deteriorating further.

At its most recent meeting, on Nov. 15, the Fed's rate-setting committee said it continued to view inflation as a greater threat than a sharp slowdown.

http://seattletimes.nwsource.com/cgi-bin/WebObjects/SeattleTimes.woa/wa/gotoArticle?zsection_id=268466359&text_only=0&slug=slowdown03&document_id=134251173

Barring some kind of shock to the economy, analysts say 2001 will then be likely to look much like the final months of 2000: weak in comparison with recent years, but not too bad when measured against the late years of other booms.

-- Martin Thompson (mthom1927@aol.com), December 03, 2000


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