BUSINESSWEEK ONLINE : DECEMBER 11, 2000 ISSUE
BUSINESS OUTLOOK U.S.: Holiday Surprise: Shoppers Are Showing Some Pep They're still spending--but with enough moderation to please the Fed Americans have cast their ballots, and their decision is clear. A few dimpled chads and arguments before the U.S. Supreme Court will not dissuade them from having a happy holiday season. Early reports on yearend shopping suggest that spending may end up better than current modest expectations, although far short of 1999's free-for-all. The season got off to a surprisingly strong start. Retail surveys show spending in the Thanksgiving week was up strongly from the previous seven days. TeleCheck Services Inc. reported that same-store sales rose 3.8% from a year ago. And malls saw customer traffic rise 6.5% from last year. Retailers will get help from the unusually long stretch of 31 days between Thanksgiving and Christmas, which gives consumers five weekends to load up on gifts. The holiday shopping season is important to the outlook because consumer spending accounts for the bulk of domestic demand, with the rest made up from capital spending and, to a lesser degree, government purchases. The Federal Reserve has insisted that domestic demand must slow below the pace of potential supply in order for inflationary pressure to vent out of the economy. That slowdown began in the third quarter. The Commerce Dept.'s second look on Nov. 29 at real gross domestic product showed growth was a bit slower this summer than first reported. Real GDP grew at an annual rate of just 2.4%, down from the 2.7% pace reported a month earlier, after averaging 5.2% in the first half. Much of the downward revision came from a larger trade deficit and slower inventory growth. But keep in mind that rising imports indicate that domestic demand, especially for capital goods, remains solid (chart). TO CRUSH PRICE PRESSURES, the economy may have to grow below its long-term trend of about 3.5%-4% for a sustained period. Happily for the Fed, the latest data on shopping, confidence, and durable goods show consumers and companies are pulling back a bit. But the slowdown isn't anywhere near sharp enough to justify the rumblings of ''recession'' being bandied about. Instead, think of the economy as a car that has been speeding along at 90 miles per hour. The Fed is trying to downshift growth to the 55-mph range to keep the vehicle from careening out of control. To achieve that speed, the Fed needs consumers to ease up. And so far, households seem willing to practice a little moderation. Shoppers may increase their holiday buying by more than the 3%-4.5% expected by analysts, but they are unlikely to boost their nonauto spending by the 10.5% jump posted in last year's fourth quarter. Powered by a surging stock market, soaring home values, and rising wage gains, the 1999 holiday season was the most successful of this expansion. In 2000, however, those supports for consumer spending are not as sturdy. Equity prices are flat or down from a year ago. Housing has cooled. Rising oil prices have cut into buying power. And climbing jobless claims signal some loosening in the labor markets (chart). Not surprisingly, consumers are adopting a more conservative attitude about the economy's prospects. Consumer confidence, as measured by the Conference Board, fell again in November to 133.5 from 135.8. The confidence index has dropped nine points in the last two months, dragged down mostly by a decline in expectations about the future. Even so, the level of confidence remains high by historical standards. The Conference Board says that while the dip in November expectations may ''reflect concern about the still unresolved Presidential election,'' confidence in current economic conditions ''points to strong holiday shopping ahead.'' CONSUMERS AND BUSINESSES alike are reacting to the increased uncertainty in the outlook, which is crimping the manufacture and sale of big-ticket durable goods, such as cars and computers. Orders for durable goods have shown extreme month-to-month volatility this year, a pattern that continued in October. Orders in the month fell 5.5%, following increases in both August and September. Aircraft and electronic equipment, which have led the year's wild swings, also caused the October plunge, but both declines followed very large gains in September. The growth trend in overall orders, while having slowed, is not collapsing. Capital-goods orders dropped 11.3% in October, but that was almost entirely the result of a 58% plunge in aircraft bookings. The general trend of orders, excluding aircraft, has tapered off, but it gives no indication of severe weakness. In fact, the nonaircraft backlog of unfilled orders continued to rise in October, as did capital goods shipments, suggesting that equipment spending in the fourth quarter is off to a solid start. The chief risk to the Fed's slowdown strategy is that tighter credit, a slower economy, and a profit squeeze could result in a hard landing for capital spending. So far, nothing that dire is unfolding, although business investment in equipment is clearly growing more slowly. It increased at a revised 5.8% annual rate last quarter--less than a third of the pace of the first half, which was well above the recent trend. Overall business investment actually turned out to be faster than originally reported, because of a huge upward revision to outlays for commercial construction. CAPITAL-SPENDING FUNDAMENTALS, while less supportive than in 1999, remain firm, at least for now. First, although credit is tighter, it is far from overly restrictive. Second, a lot of capital spending is the result of long-term trends related to the need for increased competitiveness, not just because of the cyclical ups and downs in the economy. And third, the cost of capital relative to labor still greatly favors capital, especially amid extremely tight labor markets, which are pushing up compensation. Looking ahead, profits will be a key area to watch. At a time when financing is costlier, the flow of internally generated funds may also begin to diminish. In the third quarter, corporate operating profits, compiled by the Commerce Dept., grew at an annual rate of 3.2% from the second quarter. Earnings at nonfinancial corporations fell slightly. Although profits are still growing 15.3% from the year before, the quarter-by-quarter trend has slowed sharply this year (chart). And with labor costs rising ever faster and productivity slowing, higher units costs, along with slower revenue growth, are almost certain to eat further into earnings growth next year. So far, all signs point to a slowdown, not a slump. And if consumers finish the holiday shopping season with the same gusto they showed at the beginning of it, the economy will be well on its way to a happy--if less bubbly--new year. BY JAMES C. COOPER & KATHLEEN MADIGAN _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS U.S.: Holiday Surprise: Shoppers Are Showing Some Pep CHART: Orders Flatten Out, but at a High Level CHART: A Sure Sign of a Slower Economy CHART: Profits Perform Their Own Slowdown INTERACT E-Mail to Business Week Online

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