By Alison Rice. For a year, consumers have tossed life preservers to a storm-tossed economy. While businesses kept their boats on shore, waiting for calmer weather, consumers braved the economic choppiness to buy cars, furniture, and new homes.
Now, amidst the threat of war, mixed economic indicators, and ebbing consumer confidence, some are wondering how long consumer economic rescue operations can go on.
The answer: Quite a while. "Despite the declines in consumer confidence, it's still at a level that supports spending," says Lynn Franco, director of the Consumer Research Center at the Conference Board, a research organization in New York that produces a monthly consumer confidence index. "People are looking at the top line figure, which is going down," Franco says.
It certainly has, compared to historical highs. In August, the Board's Consumer Confidence Index read 93.5, a slip from July--and a long fall from 2000 when the index hit an all-time high of 144.7. "It looks like a very dramatic decline," Franco says, but it's not the whole story. "[It's] still above 90, which is associated with a growing economy. Consumers are going to spend. They're not going to retreat from the malls."
Where does this shopping confidence come from? Money. This year, Americans are projected to receive $7.8 trillion in disposable personal income, an increase from 2001. "Real disposable incomes have been rising at 4 percent year to year," says Steven Wieting, an economist with Salomon Smith Barney in New York, who says that growth comes from increased wages, tax cuts that put more money in people's paychecks, and other payments. "Even in the recession, real income never fell."
Combine that modest growth with low inflation, and you have consumers with money in their pockets, despite national economic travails. "People spend their income," says Wieting.
Yet, stock market declines have led some experts to worry about a negative wealth effect--the expected drop in consumer spending when Americans realized their stock portfolios were worth a fraction of their 2000 glory days. (Economists estimate that 3 cents to 5 cents of every dollar of household wealth has been lost permanently as a result of the burst equity bubble, according to Wieting.)
But that hasn't happened, thanks to those increases in personal income and housing values. "The wealth effect is a secondary driver compared to income," Wieting says. And Franco agrees. "People are invested in the stock market for the long term," she says. "Jobs are the primary source of income."