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Durables Are Proving Durable


Has the U.S. slipped into a recession? Many of the economic omens have turned increasingly negative--from the collapse in info-tech capital spending to the eight-month decline in industrial production to the rise in jobless claims to a new cyclical high. Even the business-cycle gurus at the National Bureau of Economic Research, who have the task of dating recessions, recently acknowledged the possibility that a downturn has begun.

Still, many economists believe the economy will escape a full-fledged contraction. And the reason is the surprising resilience of consumer spending, which has stayed strong despite the stock market drop, rising layoffs, and heavy debt loads. Even more remarkable, says economist Robert Mellman of J.P. Morgan Chase & Co., is that this strength "derives from an unusual pickup in outlays for durable goods."

Although total inflation-adjusted consumer-spending growth has slowed to about a 1.7% annual rate, notes Mellman, outlays for durables--which bounced around last year--accelerated sharply to a 13% annual rate in the three months ending in April (chart). Meanwhile, real consumer spending on services and nondurables, which accounts for 60% of gross domestic product, is up at a mere 0.5% annual pace.

This pattern of big-ticket goods outperforming other consumer spending at a time when overall outlays and economic growth are slowing doesn't look like the prelude to a recession, says Mellman. Normally, demand for durables tumbles just before a downturn, as it did in the late 1970s and late 1980s when people started to defer large purchases.

This time around, however, sales of such items remain relatively strong, led by the upturn in unit sales of cars and light trucks. Real spending on motor vehicles in the first half of this year should post a 5% annual rate, says Mellman. Current upbeat production schedules would also add about a percentage point to the economy's growth rate in the third quarter.

Sales of other durable goods are up as well. Real spending on furniture and appliances has been growing at a nearly 6% annual clip this year. Unlike business spending on high-tech equipment, consumer outlays for computers and peripherals has accelerated sharply, aided by falling prices. And spending on such items as sporting goods, boats, and jewelry has strengthened.

What's behind this unusual strength? A key factor, says Mellman, has been the Fed's interest-rate therapy, which has cut financing costs for purchases of vehicles, homes, and housing-related goods. Meanwhile, unemployment remains relatively low, real wage gains have been healthy, and housing wealth, which accounts for the bulk of most people's net worth, is running nearly 9% over last year's levels.

To be sure, some economists still expect that a delayed negative wealth effect from the stock market correction will touch off a sharp retrenchment in consumer spending. With the market up some 12% from its March low, however, and sizable tax refund checks just weeks away, J.P. Morgan's economists think durable outlays will hold up and consumption will continue to grow modestly in the months ahead. From 1990 to 2000, world military spending fell from 3.7% to 2.4% of global gross domestic product. That's the good news for those who favor reductions in such outlays. The bad news: spending has stabilized since 1998.

In 2000, industrial countries devoted about 2.5% of GDP to defense expenditures, according to International Monetary Fund estimates, while developing countries spent 2.1%. But there are still large differences across regions. Outlays remain highest in the developing nations of the Middle East, which last year allotted 7.8% of GDP to their militaries, or about 29% of total government spending.

Other big defense spenders are the newly industrialized Asian economies, at 3.3% of GDP and 15.4% of government outlays. The lowest spenders, devoting just 1.2% of GDP and 7% of government budgets to military programs last year, are developing countries in the Western Hemisphere. Between 1990 and 1999, the percentage of U.S. households holding stocks rose from 34.2% to 50%, and the equity share of the household sector's total assets jumped from 13% to 33%. Does that mean most Americans became avid stock investors--with the implication that the boom's end has traumatized the public?

Not according to a Federal Reserve Bank of New York study by Joseph S. Tracy and Henry Schneider. Focusing on typical families rather than aggregate data for the household sector, they report that equities rose only from 5% of the average household's portfolio of assets in 1989 to 11.6% by 1998.

Moreover, their analysis rejects the view that this rise was caused by gung ho households funneling more cash into stocks. The aging of the baby boomers, rising education levels, and the shift from traditional pension plans to savings plans like 401(k)s all contributed to the rise, they report. But the main factor was simply the huge increase in stock prices themselves.

In sum, write the authors, "the average household equity share rose in the 1990s not because Americans were flocking to Wall Street's party, but because those already attending decided to stay on." Most households, it seems, react sluggishly to the market's shifting performance, which may help explain why consumption has held up despite the pullback in stock prices.


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