| BUSINESSWEEK ONLINE : MARCH 1, 1999 ISSUE | ||||||||
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| CORPORATE SCOREBOARD
How Long Can Americans Keep Splurging? Bill Palmer is naturally a little tight with his money. His first move with every paycheck is to stash a good chunk of it in IRAs for himself and his wife. Then there's the college trust and Roth IRA contributions for his sons, aged 8 and 10. ''The last big thing we bought was a piano three years ago,'' says the 51-year-old Delta Airlines pilot. Call it a survival mechanism developed in the 1980s, when Palmer suffered through several furloughs. But lately, he's loosening up in spite of himself. And why not? His job is solid and the retirement accounts are swelling. On Jan. 1, Delta's pilots got a 2% pay hike--their first in six years. Now, Palmer is pondering a new car, and in July, he plans to take the family on an Alaskan cruise. ''The purse strings are comfortable right now,'' concedes the Denver native. ON CALL. For many other U.S. consumers, those purse strings got downright loose in 1998. Americans are spending money as fast as they make it, thanks to real income growth of 3.1% last year, rising real estate prices, and a bull market that has helped the average American household's net worth soar 28% in the past three years, to $353,000. To the surprise of virtually every economist, consumer expenditures, which account for two-thirds of the U.S. economy, grew by a remarkable 4.8% last year. ''They have jobs. Their relatives have jobs. Their incomes are growing. There's not a lot to worry about right now,'' explains David Wyss, chief economist for Standard & Poor's DRI. Can they keep it up through 1999? The answer will be key to the profitability of industries ranging from autos and housing to retail and health care. Consumer optimism prevented a dismal 1998 earnings picture from getting ugly. Now, with business and government spending expected to slow and the trade deficit expanding, consumers may again be called upon to save the day. Most economists say consumers will come through, albeit with slightly less oomph. The two key factors that drove spending increases last year remain in place. First, with unemployment holding well below 5%, labor is still a seller's market. Following last year's 2.4% real gain in wages--the largest increase since 1977--DRI expects an additional increase of 1.9% in 1999. Second, the astoundingly strong stock market has U.S. consumers feeling particularly rich. The Standard & Poor's 500-stock index rose 26.7% in 1998, its fourth consecutive year of 20%-plus increases. Many seem to feel they can spend that paycheck and more, and their stocks will more than make up for it. It will take more than a crisis in Asia to shake that feeling. RATE HIKE? Still, it would be almost impossible for consumers to maintain last year's pace. Falling interest rates fueled record home sales of 5.7 million, pushed up housing starts by 9.5%, and sent sales of light vehicles up 3.3%. Most economists expect the Federal Reserve to raise interest rates in 1999. Kenneth J. Matheny, an economist with Macroeconomic Advisers LLC in St. Louis, expects consumer spending to slow to 3.3%--which would still be the second-best year in this economic expansion. That more modest consumption also is likely to be spread less evenly. Some casualties early in the year will be the strongest performers from 1998, DRI's Wyss says--housing and autos. He also expects slower growth of spending on personal computers and nondurable items such as clothing. On the other hand, sectors that typically lag behind home sales, such as furniture and appliances, should remain robust. Consumers may have enough new homes with enough new cars in the garage. But don't expect them to turn miserly anytime soon. By Andrew Osterland in Chicago _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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