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Jewish World Review August 29, 2001 / 10 Elul, 5761

Mort Zuckerman

Mort Zuckerman
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Consumer Reports

Hail, brave consumer

http://www.jewishworldreview.com -- THE American economy, roaring along at a dazzling pace for the past nine years, hit a wall last year without benefit of having hit the brakes. It was all so surprising. Precipitated by a stunning reversal of business capital spending, the crash was followed by a collapse in business profits, which are now tumbling at an annual rate of 20 percent-and more than double that if we include write-offs and charge-offs. These are nosebleed drops in earnings that normally occur only during a full-fledged recession, not during the slow growth we're now experiencing.

So no wonder business confidence has collapsed and corporate cost cutting, focused now on labor costs, is being pursued with such intensity. The amazing thing is that the economy is still moving forward at all-at a snail's pace to be sure, but forward nonetheless. With its recent rate cut, the Federal Reserve has continued its most aggressive monetary easing in nearly 20 years. But the cuts have been less effective during a supply-side recession than they typically are during demand-side slowdowns. It's the optimism of the resilient American consumer that has enabled us to escape a recession to date.

Perhaps it's a residual thing-after so many years of good times, consumer optimism seems impervious to all the layoffs and to the most rapid decline of net worth in over 30 years. Because they have known only good times, many Americans aren't rattled by the signs of trouble. More than half the workforce entered employment after 1983, and the only recession they ever experienced was brief-and was followed by the greatest expansion in American history. So despite a doubling of consumer debt over the past five years, millions of Americans continue to spend through the slowdown, unfazed about borrowing to finance purchases.

Multiplier effect. It is all the more remarkable in light of the corporate cost cutting, focused on capital cutbacks but inevitably affecting labor. Unemployment increases have now spread from temporary help to more permanent jobs. Two thirds of the job cuts over the past few months have fallen on managers, executives, professionals, and their clerical and administrative staffs. These people make up the highest-paid segment of the U.S. economy, so when they lose jobs, there is a multiplier effect on aggregate demand. We added over 9 million such jobs in the last six years of the '90s, and these are the people who are now being shed at unprecedented rates. Even those who keep their jobs will lose a lot of valuable compensation, such as year-end bonuses, profit sharing, and stock options.

The $64,000 question is the impact of all this on the American consumer, who saves so little, is indebted so much, and whose net worth has declined this year. Household incomes can stretch somewhat with the lower interest rates stimulated by the Fed, the decline in energy prices, and the overall lack of inflation. There's a tax rebate in the mail, but the postman is also delivering more and more pink slips. So the consumer is still at risk-witness the record level of personal bankruptcies and credit-card delinquencies.

What will happen if there is a period of even slower growth, or a recession, when only the top 40 percent of the income groups can sustain their spending for any extended period of time, while the rest of the population has virtually no financial reserves? The major untested leverage points in the economy today are the paucity of savings and the tremulous household balance sheet. If the consumer gets scared, we could soon see an avalanche of defaults in household debt followed by much tighter credit. That kind of collapse would bring the most serious downturn since the end of World War II.

Compounding the risk is the rapid decline in exports. For the first time since the war, all three major locomotives of economic growth in the world-Japan, Europe, and the United States-are in decline. And with only 75 percent of our manufacturing capacity being used, and 65 percent of our high-tech capacity, there is very little hope of a resumption of growth from a further burst of investment.

The good news is that consumer assets have also skyrocketed in value. Thanks to the strong gains of the '90s, they are now about 6.5 times household debt. Here is the reason, no doubt, why the consumer feels wealthy enough to continue spending. The confidence factor is real, but it's also vulnerable to big shocks like a plunge in the stock market or accelerated unemployment. Everything, for the moment, turns on American consumers. May the Force stay with them.



JWR contributor Mort Zuckerman is editor-in-chief and publisher of U.S. News and World Report. Send your comments to him by clicking here.

Up


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© 2001, Mortimer Zuckerman