Consumers Not Buying Robust Economy

Like the many millions of Americans who have indulged their passion for consumer comforts during the 1990s, Henry Smith recently dished out $700 for custom mirrors and other luxuries he plans to install on a Harley-Davidson motorcycle.

Only he hasn’t yet bought the Harley. The 49-year-old telemarketer from Santa Monica lately has become more cautious about parting with his money. Confronted by uncertainty about President Clinton’s future, wild turmoil in the stock market and relentless bad economic news from overseas, Smith has put off buying the $9,000 “Easy Rider” bike he had all picked out.

“Everything is in a state of flux,” he said as he was leaving the Glendale Galleria. “And until it calms down and they get all that stuff straightened out on [Capitol] Hill, I’m just going to hunker down and live within my means.”

To those who monitor the U.S. economy, there is perhaps no gauge as critical as consumer confidence, an intangible drive to make the purchases that keep factories, distributors, retailers and banks humming. Consumer spending has propelled the 1990s boom, and--now that fallout from overseas has hit American manufacturers, exporters and farmers--consumers increasingly stand out as the bulwark against a more serious slowdown.

Consumer confidence remains very high, according to the latest household surveys. But as Smith’s unbought Harley shows, it is slipping.

The Conference Board, which surveys 5,000 households each month, has found that its measure of consumer optimism has fallen nearly 10% since its June peak. The University of Michigan’s index reached a plateau in early 1998 and has also declined over the last few months.

“Any way you look at it, it’s going down,” declares David Wyss, chief economist at Standard & Poor’s DRI consulting firm in Lexington, Mass. “The direction is wrong.”

“It’s fragile, it’s falling--but it’s still high,” said Mark Zandi, an economist at Regional Financial Associates in West Chester, Pa. But if worrisome news escalates, he said, “the question is whether we’ll see a collapse in confidence.”

Despite the drumbeat of frightening news about the stock market and financial crises overseas, most experts still judge the U.S. economy to be in solid shape. Employment remains exceptionally high and inflation unusually tame. Low interest rates have made homes and other major purchases affordable for many Americans. Moreover, the Federal Reserve Board has signaled that it will cut interest rates further to offset any downturn.

The question is whether public psychology has started to change. Such a shift could have a far-reaching effect on the economy, particularly with the Christmas shopping season around the corner.

With the stock market down more than 15% since its July peak, affluent consumers in particular are feeling the pinch of declining wealth. And with nearly 40% of all households now owning stocks, the market’s woes are hitting a broad segment of the middle class.

Meanwhile, business executives are increasingly attuned to the distress overseas, particularly to signs that it is affecting their profits and reducing the availability of credit.

In a September survey of conditions around the country, the Federal Reserve Board cited “a sharp deterioration in business and household expectations” in several U.S. regions, including the West Coast. The public, highly employed and many with rising incomes, has been bombarded with headlines about global economic crises and financial chaos. Last week’s Newsweek magazine shouts out on its cover: “The Crash of ‘99?”

“More and more, our customers are whispering in my ear: What is the possibility of a global recession?” said Sung Won Sohn, chief economist for Norwest Corp., which is merging with Wells Fargo & Co. in San Francisco. “They are genuinely concerned. These are not big shots from the East Coast or West Coast. These are regular businessmen in Middle America.”

For now, however, such concerns co-exist with a broad public expectation that the U.S. economy will muddle through the current global mess, its 7-year-old economic expansion intact. Lisette Cicconi is firmly in this camp.

Cicconi, 49, just bought a $169 black leather backpack and overnight tote at the Glendale Galleria. A month before she purchased a fully loaded Dodge minivan.

“I am feeling rather cautious,” said Cicconi, a sales representative for a Woodland Hills firm that provides interior decor for hotels and restaurants, including in Asia. “But at the same time I’m not going to skimp on anything. I haven’t yet.”

Although she has concerns about financial turmoil overseas and political uncertainty here, Cicconi says a greater threat is gloomy media coverage that emphasizes the economy’s vulnerabilities.

“People keep reading this stuff and think, maybe I shouldn’t do this or that because the bottom is about to drop out,” she said.

Not that Sam Murray is worried too much about such problems. The businessman, 45, who recently bought a cellular phone at the same mall, said he is “looking forward to a good year.” Murray took heart in the Fed’s recent decision to cut interest rates by a quarter point, a move that he predicts will spark more lending.

“People are going to be buying more now, and that could pick everything up,” he said. “I think things are going to pick up overall.”

Such attitudes matter because consumer spending is a monumental portion of the economy. It accounts for more than 68% of the nation’s $8.4-trillion gross domestic product. It towers over business investment, government services and exports, none of which exceeds 18%.

In one sense, the upbeat attitudes at the mall are entirely consistent with the consumer confidence surveys, in which people answer questions about current conditions in rosier terms than any since the booming 1960s. But many of these same survey respondents sound less optimistic about what they expect to happen in several months.

The Conference Board’s “expectations index,” while still high last month, was at its lowest levels in two years.

Some economists, looking at a range of indicators, maintain there are clear reasons for consumers to shift their outlook down.

Overall, the household savings rate is barely above zero, a reality that could combine with a stock market downturn to make many Americans less willing to dispose of their income in shopping centers and auto showrooms.

“With the boom in the stock market, people felt comfortable spending their money,” said Wyss of Standard & Poor’s. “You didn’t have to save because the stock market was doing it for you.”

On top of that, household debt levels are at post-World War II highs, raising concerns that people will significantly scale back their purchasing behavior. “The consumer is the engine of growth in this country, and right now the consumer is starting to look tapped out,” Wyss said.

Michael Moran, chief economist at Daiwa Securities in New York, said be believes that the fall in the stock market and the fall in confidence have gone hand in hand. “I’m keeping a close eye on that indicator,” he said of consumer confidence, noting that it could signal a decline in household spending.

For all the new questions, Rosa Lopez, 61, echoes the optimism that many Americans retain about their prospects.

“I just listen to the news and say, ‘Oh well, I’m not going to let it bother me,’ ” she said, waiting for her car at the Tire, Wheel & Hubcap Depot in southwest Houston.

“In my life the economy has gone up and down many times,” said the retired Sears clerk. “I don’t feel things are so bad now that I have to cut back on spending. I do everything the same as always.”

Lopez, who keeps all but one credit card locked in a safe-deposit box, said that she has some savings in the stock market and she and her husband, a retired auditor, have no plans to take it out.

“We’re just riding this out,” she said. “Things will get better.”

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Times researcher Lianne Hart in Houston and special correspondent Stephen Gregory in Los Angeles contributed to this story.