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It isn't surprising, in the wake of the Sept. 11 terrorist attacks, but it's disheartening nonetheless: After nearly a year of energetic buying that kept the economy from dipping into a recession, the relentlessly confident American consumer is in retreat.
In the Conference Board's monthly survey, issued on Sept. 25, consumer confidence plunged 14% -- its largest monthly drop since October, 1990. "The consumer obviously cannot feel as confident as he or she did before the attack," says Milton Ezrati, senior economist and strategist at Lord Abbett & Co., who adds that he had expected a major decline.
A Sept. 25 report on retail chain stores from Bank of Tokyo-Mitsubishi and UBS Warburg found that spending dropped 0.8% for the week ended Sept. 22, after declining 1.4% the week before. Even in the context of the most damaging terrorist attack ever on U.S. soil, "those are awfully big negative numbers," says Mark Zandi, chief economist at economic consulting firm Economy.com. He also notes that the Mortgage Bankers Assn. reported on Sept. 19 that the number of people applying for mortgages is declining as well -- down 11.4% from the prior week. "You have to be confident about your financial future to put a downpayment on a home, and recent events are shaking people's ability and willingness to do that," says Zandi.
WHERE'S THE BEEF? Adding to the downbeat research are reports from individual companies. Federated Department Stores (FD
) said on Sept. 24 that its sales were about 20% lower than expectations for this time of year in the first few days after the Sept. 11 attack. Smith & Wollensky Restaurant Group (SWRG
), a chain of high-end steakhouses, reported on Sept. 20 that its revenues for the month were running 30% below the same period a year earlier.
This kind of spending clamp-down has historically followed other shocks to U.S. consumers, most recently during the Persian Gulf War. This time around, many economists hope Federal Reserve rate cuts and federal spending on rebuilding will soon start stimulating the economy, making up for some of the downturn in consumer spending.
However, there's no mistaking that the recent spate of reports are bad news for the economy, since strength in consumer spending, which makes up two-thirds of the gross domestic product, is largely what had been keeping the U.S. out of recession this year. Now, economists have little doubt that the economy has begun to contract.
WORSE TO COME? "Basically, consumers are frozen," says Edward Deak, an economics professor at Fairfield University in Connecticut. He thinks consumers are restricting spending to basics and small items, if that. "It's going to take quite a while to return to something that looks normal," he says.
Still, all the reports on Sept. 25 weren't necessarily bad news for the markets. In fact, investors had anticipated what was coming, as evidenced by the market's steep slide a week earlier. "I expected consumer confidence to be way down in light of what has happened," says Jon Burnham, portfolio manager of the Burnham Fund. "A lot of this is already in the market." Indeed, despite the bad news on consumer confidence and retail spending, major stock indexes managed to stay in positive territory on Sept. 25, with the Dow Jones industrial average closing up 56 points.
The problem, says Zandi, is that the latest consumer-confidence number may not yet reflect the full impact of the attack. The Conference Board, which surveys consumers all month, noted in its release that there was no real difference in responses before and after Sept. 11. To Zandi, that signals consumer confidence has further to fall as a result of the attack. "I don't think it has sunk in yet," he says, adding: "The worst is yet to come." Just a week ago, Zandi says, he expected confidence to come down -- but not to cave in. Now, he says, "I'm concerned that is happening."
THOUGHTS OF WAR. The unprecedented nature of the terrorist attacks makes it impossible to guess how consumer confidence will be affected in the future, says Lynn Franco, director of the Conference Board's Consumer Research Center. However, consumer confidence closely tracks layoff announcements, which have accelerated since the terrorist attacks. "That does not bode well," says Franco.
Most economists say the future of consumer spending now hinges on the U.S. military response. Another terrorist attack, even something small in scale, could send the consumer into hiding, worries Deak. If people really feel unsafe, he believes that even continuing interest rate cuts by the Fed won't put them in the mood to make major purchases.
On the other hand, quick and concise retaliatory action by the U.S. could go a long way toward restoring confidence -- especially if terrorists are taken into custody without major reprisals from the Middle East. "Every day that goes by where there is not another attack, people creep back to what they were doing before," says investment strategist and author Peter Cohan. "The critical thing in my view is getting back a sense of security."
BLEAK HOLIDAYS? Barring another shock, says Lord Abbett's Ezrati, "there may even be some accumulated demand from consumers who have postponed purchases." That could kick in for the holiday season, when desire to be with family and friends is sure to be particularly strong.
No one is expecting really strong holiday sales, though, because of the uncertain economy and consumers' increasing timidity. Says Deak: "Given the range of potential events, it becomes very difficult to spin a scenario where holiday buying is on par with last year, or even reasonably close to it," says Deak.
The bottom line is that the news on consumer spending seems sure to get worse before it improves. But in the wake of so many weak economic and corporate reports, the silver lining is the market may have already figured that out.
Copyright 2001 , by The McGraw-Hill Companies Inc. All rights reserved.
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