The American economy is a song of seduction aimed at the very soul of the consumer.
“Buy or I will die,” it begins.
“Your job depends on it,” it ends.
That song is played endlessly in every market, every business, every media outlet across the land. Things go better if! You will be more successful if! You will be sexier if! You will be happier if . . . you keep on buying.
The government plays it, too. Here’s your tax cut. Go out and spend it. Here’s your lower interest rate, go out and borrow. Now. All together now: President Bush and Federal Reserve Chairman Alan Greenspan are concerned people will lose confidence.
All this is based on a simple premise: The mind of the consumer is the most important commodity in the economy. And for a good reason: Two-thirds of gross domestic product, the market value of annual production of goods and service, is consumer spending.
Slow that down too much and you have a recession. We could be on the verge of one now, if it hasn’t already started. This is happening partly because businesses miscalculated last year. They failed to read the minds of consumers correctly. They produced too much.
But it is happening primarily because consumers have pulled back, spooked because they lost money last year in a stock market that overvalued “new economy” technology firms, spooked because of a wave of layoffs that began in manufacturing last year, spooked by a daily downbeat drumbeat on cable television financial broadcasts, and spooked perhaps because of their own debt.
All this is adding up to an economic slowdown of perception, one rooted firmly in the attitudes of buyers and sellers, neither of whom understood each other in a boom that less than a year ago seemed as if it might last forever.
But those perceptions were not based on irrational behavior. Companies ramped up their production a year ago in anticipation of big Y2K sales, said Michael Drury, economist at McVean Trading Co. of Memphis.
They just waited too long to curtail them. Consumers in some areas began to feel the pinch of manufacturing layoffs, along with higher interest rates and smaller portfolios that affected their own sense of economic well-being.
Kate Bronfenbrenner, director of labor research at Cornell University, said that, toward the end of the boom, Americans had grown more confident about the economy, feeling that if the expansion lasted longer, job security would be more established.
That didn’t happen, she said. “Even though the economy was booming, workers found the economy churning with so many acquisitions, so much contracting out, so much privatization of public services. They aren’t sure . . . whether they are going to have good jobs.”
Good times can turn into bad times faster than many economists believe, she said, simply because consumers never did develop the kind of thorough optimism about job security that would prevent them from retrenching on the first negative sign.
On top of that, energy bills began rising, reminding many Americans of the 1970s, when oil prices surged. By the end of 2000, surveys taken by the Conference Board and the University of Michigan showed deterioration of consumer confidence.
Emotion drives the U.S. economy because it is grounded in material acquisition. Americans save less and spend more of their income than most consumers in the world.
Americans see themselves as part of the world’s most productive, technologically advanced and innovative economy–not as controlled as Japan’s or as hobbled by government spending programs as in Europe. Other countries love the strong dollar, and they willingly produce goods aimed directly at the spending prowess of the U.S. consumer.
To the rest of the world, the U.S. is a consumption paradise. No one likes to see the mood of the American consumers turn sour. Their attitude serves as the main engine for world economic growth.
This puts consumers on a consumption treadmill that economists do not consider healthy in the long run and say probably can’t last forever. The low level of U.S. personal savings means that funds must be imported to help finance buying and investments.
In the fourth quarter last year, Americans were spending at an annual rate of $6.9 trillion out of a total economy (which includes investments of all types) of $10.1 trillion. Going into debt, they spent nearly 1 percent more than they earned in that quarter.
Bad economic news, much of it coming in December, has caused people to put off purchases and scale back spending, so much so that Greenspan said economic growth had sunk to near zero.
“If I start feeling a little uneasy, I am not going to put that extra money in the stock market or I am going to hold off on buying a new car,” said Mark Berger, director of the Center for Business and Economic Research at the University of Kentucky.
Job prospects are far and away the key indicator of consumer confidence. The old saying goes that if your neighbor loses his or her job, it’s a recession, but if you lose it, it’s a depression. Since June, 254,000 manufacturing jobs have been lost, and industry is still shedding jobs. Even so, other sectors are still hiring. The unemployment rate is still low at 4.2 percent, although it has been rising.
“By any definition, we will have a very tight labor market,” said Sung Sohn, chief economist at Wells Fargo Bank. “There are many small and medium-size companies still trying to hire thousands of people.”
The fall in consumer confidence seems extreme in relation to the total unemployment picture. What may have happened is that a confluence of bad news in December and January, including large, highly publicized layoffs, had an exaggeratedly dispiriting effect.
Lynn Franco, economist at the Conference Board, said the business group’s index of consumer confidence dropped sharply in January to levels normally seen prior to a recession.
The board surveys 5,000 U.S. households each month (about 3,500 respond) to determine the level of consumer confidence, she said, and January was the fourth decline in a row. It might be added that the survey is one of those indicators that could make things worse. People hate to read that they are in a bad mood, even if they are.
Franco said interest rate cuts by the Federal Reserve, along with the prospect of a tax cut, may alleviate fears “and we may see a pickup in their expectations.”
One will never know for sure how much Greenspan and President Bush have directly contributed to the decline in confidence. To put it mildly, neither has been a cheerleader, with the Fed chairman telling Congress the economy was, in effect, near a recession, and the president, pushing his $1.6 trillion tax cut, warning the economy may be “in danger.”
Before Bush took office, some economists, including one working in the White House for President Bill Clinton, took Bush to task for “talking down the economy.” Bad-mouthing it could turn out to be a self-fulfilling prophecy, his critics said.
Bush did not stop. On Thursday, president said the tax system is taking too much money out of the economy and acting as a drag on growth. He said his cut would “jump-start the American economy.”
It’s a matter of debate whether the Bush tax plan will work as planned. Many economists think cutting taxes now is a bad decision, because it would eat up much, if not all, of a 10-year budget surplus. Former Congressional Budget Office Director Robert Reischauer said he preferred keeping a surplus so the government will be better fixed to handle the impending retirement of Baby Boomers.
Another argument is that the Bush tax cut would actually do more harm than good by draining off the surplus, which serves as sort of a giant national savings pool that many economists feel keeps interest rates lower.
Barry Bosworth, a Brookings Institution scholar and an economic adviser to President Jimmy Carter, said that, with the tax cut, the surplus will be spent, not saved, in line with current tendencies of Americans.
To Bosworth, such a squandering of the surplus will ultimately mean Americans will have to borrow even more money from overseas to keep up their consumption habits.
On the other side of the fence, conservative economists say the federal tax burden is too high.
“Whenever the federal tax burden nears or exceeds 20 percent of gross domestic product, the economy tends to have troubles,” said Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson Inc., an investment banking firm in Chicago.
Many economists make the same claim, but history fails to make a convincing case. True, a deep recession occurred in the early 1980s after the federal tax burden approached 20 percent. At times, high deficits have pushed up interest rates.
But all during the Depression-ridden 1930s, the federal tax burden never topped 10 percent. The current 20.7 percent tax burden, which includes Social Security taxes, is the highest since the 20.9 percent of 1944, when American industry was stretched to its limits building armaments for World War II.
Confidence, it appears, is in the eye of the beholder.
