| BUSINESSWEEK ONLINE : APRIL 26, 1999 ISSUE | ||||||||
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| BUSINESS OUTLOOK
U.S.: The Deepening of America's Pockets As wealth in the U.S. reaches record highs, so does spending Alexis de Tocqueville observed that the love of wealth is at the bottom of all that Americans do. That was back in 1835. And just recently, data from the Federal Reserve confirm that Americans as a whole are getting dramatically wealthier, thanks mostly to the stock market. More important, those riches are financing a spending boom, the likes of which have never been seen this far into a business cycle. The Fed's numbers show that household net worth--total assets minus liabilities--increased 10% in 1998, to more than $36 trillion. Assets including real estate, bank accounts, and stockholdings rose $3.4 trillion faster than liabilities, such as mortgages and consumer credit. The asset buildup was led by double-digit percent increases in corporate equities and mutual funds. Over the past decade, net worth has doubled, with the largest gains posted in the past four years (chart). To be sure, the surge in wealth is lopsided. Fed Chairman Alan Greenspan has said that most of the capital gains have gone to the upper 20% of income earners. Meanwhile, 13% of Americans remain in poverty, and 16% have no health insurance. But for the economy as a whole, the wealth gusher yields a vibrant outlook for consumer spending, especially in combination with the surge in the buying power of income that is resulting from the mix of strong job markets and falling inflation. The rule of thumb is that households spend 3 cents to 5 cents of every new dollar of wealth over the span of two years. The total 1998 wealth gain gave families between $102 billion and $170 billion to spend. That's enough to account for additional growth of between 1 and 1.5 percentage points in real consumer spending, which has grown 4.5% per year for the past two years. Moreover, it would amount to between 0.7 and 1 percentage point of the economy's overall growth rate of 4%. MUCH OF THIS WEALTH EXPLOSION is probably locked up for years to come, as baby boomers save for their retirements and their children's education. And the gains from a soaring stock market have increased nest eggs without it showing up in the measured personal saving rate, which has been near zero for about a year, down from about 3% two years ago. What's more, consumer spending in the first quarter was apparently so strong relative to income growth that the saving rate went deeper into negative territory for the second quarter in a row. Based on the Commerce Dept.'s latest report on retail sales, consumers last quarter were buying everything that wasn't nailed down. The government said that March retail sales rose a scant 0.2% from February, but the big news was the upward revision to February buying, which put the sales increase for that month at 1.7%--nearly double the 0.9% gain originally reported. Moreover, January buying was revised up to show a 1.3% advance instead of 1%. Taken all together, and adjusted for inflation, real retail sales in the first quarter grew at an annual rate of 16% (chart). The fourth quarter's nearly 11% clip was powerful, but except for one quarter in 1978, last quarter's retail surge was the largest in the government's record books, which go back to 1967. Sales at clothing stores led the surge, posting the strongest quarterly gain in more than 20 years. Department stores also registered a solid showing, the best of this expansion. And furniture stores enjoyed big sales gains resulting from the housing boom. BASED ON THE RETAIL SHOWING, the measure of real consumer spending in the gross domestic product data, due out later this month, will likely show that consumers increased their spending at an annual rate in the neighborhood of 6%. That would make the fifth consecutive quarter in which household purchases grew above 4%, a trend that hasn't been seen since the mid-1980s, in the early stages of recovery from the severe 1981-82 recession. Even considering that the widening in the trade deficit, by itself, appears to have subtracted some two percentage points from GDP growth last quarter, it is now clear that consumers powered yet another quarter of solid economic growth. And with business inventories in February at a record low relative to sales, future production is on firm footing. But it's not just wealth gains that are pumping up consumer purchases. Thanks to the combination of strong job markets and falling inflation, the buying power of households' incomes is rising at the fastest pace in a decade. Last year aftertax household income rose 4.3%. That was actually less than the 4.8% average annual pace since this expansion began in early 1991. However, thanks to the ongoing decline in inflation, real household income grew 3.5% last year, a full percentage point higher than the expansion's average. THE GOOD NEWS ON INFLATION continued in March, except for some upward pressure on energy prices in the wake of the recent agreement among oil producers to cut output. The inflation news is likely to stay upbeat for the rest of the year, especially as much of the world continues to struggle with weak domestic demand and excess production capacity. Producer prices rose only 0.2% in March, with core prices--excluding energy and food--unchanged for the second consecutive month. March consumer prices increased 0.2%, with core prices up only 0.1% for the third month in a row. The 25% jump in crude oil prices in March means that consumers will have to allocate more of their income to energy in coming months. Consumer energy costs increased 1.6% in the month, fueled by a 3.7% increase in the pump price of gasoline and a 0.9% rise in fuel oil. Also, not all of the effect of the recent crude price increase showed up in March consumer prices. Look for some additional impact in the April numbers as well. However, the mix of a strong dollar and global weakness outside the U.S. remains a powerful dampening influence on overall inflation. Apparel prices fell 0.3% in March, the fifth consecutive monthly decline. Since October, clothing prices are falling at a rate not seen in 50 years. In addition, even service-sector inflation, which is less influenced by global factors, is edging lower (chart). If there is a downside to the recent spate of gains in household wealth and buying power, it is the economy's growing dependence on consumers to keep growth moving along at a healthy clip. Any sudden erosion in either of these supports could easily knock consumers--and the economy--off stride. But as long as the Dow and the job markets remain strong, the first-quarter retailing numbers extend de Tocqueville's idea about wealth being at the bottom of what Americans do. That's because one thing they do best is spend. BY JAMES C. COOPER & KATHLEEN MADIGAN _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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RELATED ITEMS CHART: Wealth Has Doubled in Just a Decade CHART: A Near-Record Surge in Retail Sales CHART: Inflation Heads Further South INTERACT E-Mail to Business Week Online | |||
