July 8, 1996
Analysis: Consumers Are Driving the Expansion
By RICHARD W. STEVENSON
WASHINGTON -- President Clinton claims the credit for himself, and analysts cite an array of other possible factors, but the most important source of the economy's remarkable resilience and vibrancy this year appears to be the consumer.
For most of this year, Americans have been spending prodigiously on homes, cars, refrigerators and dinners out, carrying forward an aging economic expansion that as recently as January seemed in danger of expiring. In the process, they have largely ignored warning signs that they are becoming overextended.
The consumer spending spree was a major force in the surprisingly robust economic data released Friday, economists said. The Labor Department estimated that the economy created 239,000 jobs in June, far more than expected, making that month the fifth consecutive one with strong employment gains. The unemployment rate now stands at 5.3 percent, the lowest level in six years, and the pace of economic expansion is so rapid that it has revived fears of inflation.
Among the industries showing the biggest gains were retailing, which added 75,000 jobs in June, nearly half of them in what the government classifies as eating and drinking places.
Job growth was also strong at car dealers, gas stations, hotels and stores selling building materials, garden supplies and home furnishings. Employment in construction was up by 23,000, reflecting in part the continued strength of home building.
"Consumer spending is two-thirds of gross domestic product, and consequently without consumer spending supporting it you cannot have substantial economic strength," said Sung Won Sohn, the chief economist at Norwest Corp. in Minneapolis. "It's a very important part of the picture, and apparently consumers are not ready to stop spending."
Just how long consumers can carry on with their free-spending ways, however, remains an open question and one that is critical to policy makers at the Federal Reserve as they decide whether to raise interest rates to keep the economy from accelerating enough to generate increased inflation.
Some economists believe that consumers have amassed so much debt that they will be forced to rein in their spending for the rest of the year, resulting in a slackening of economic growth. Credit-card delinquencies in the first quarter were at their highest level since 1981, and personal bankruptcies were up 15 percent from the first three months of 1995.
The ratio of total household debt to after-tax personal income is at record levels, said a recent report from the Jerome Levy Economics Institute at Bard College.
The report said a recent survey by the Fed of the willingness of banks to make consumer loans had shown a sharp drop, suggesting that banks were increasingly concerned about the ability of their customers to make loan payments and would clamp down on credit.
Most economists also agree that the surge in spending this year has been driven in large part by temporary factors -- including low interest rates, higher-than-expected tax refunds and rebates from auto makers -- that have been reversed or phased out.
Long-term interest rates have been pushing higher since March, making mortgages and other loans more expensive. Though sales of new homes in May were at the highest level in a decade, housing analysts expect higher rates to restrict sales of new and existing homes in coming months, cooling off one of the most important sectors of the economy.
The runup in interest rates has already ended a boom in mortgage refinancings that swept the country last year. By renegotiating home loans at lower rates, many consumers benefited from increased disposable income that they spent during the first half of this year on cars and other goods and services. With the number of refinancings having plunged, the economy will not get any additional boost from that source.
Tax refunds have long since been sent to most people who are getting them. And after generating strong sales with rebates and special promotions, car makers saw sales level off or decline last month.
"It seems likely that most of the factors that helped accelerate the economy are no longer providing a boost," said John Lipsky, the chief economist at Salomon Brothers in New York.
One wild card in assessing the course of consumer spending is the stock market, which has been making many relatively affluent consumers feel flush with its continued boom.
Economists have grappled for years with the question of the extent to which paper gains on stock market investments lead consumers to spend more, and they still do not agree on an answer. But they said it was relatively clear that the bull market of recent years -- and the fact that more and more Americans invest in the market through retirement plans and mutual funds -- has provided some impetus to consumers to spend more.
"The stunning rise in financial net worth over the last year means that in the aggregate, the growth in consumer credit has not implied any deterioration in household balance sheets, but somewhat more strain on cash flow," Lipsky said. "So far there is no evidence that consumers feel restrained by their debt levels or by interest rates."
Copyright 1996 The New York Times Company