List­less con­sumers put brakes on spend­ing

The Washington Times Weekly - - National - BY PA­TRICE HILL

The founder­ing econ­omy has left Amer­i­cans con­sumers list­less and frus­trated — with many un­will­ing to splurge at the malls and un­able to take ad­van­tage of the low­est mort­gage rates on record to buy a house or im­prove their fi­nances.

Re­ports out on Sept. 14 showed that growth in re­tail sales came to a near halt last month amid a ma­jor loss of con­fi­dence spawned by tur­moil in the fi­nan­cial mar­kets and a mon­u­men­tal fight in Congress over the bud­get deficit. The col­lapse in spend­ing oc­curred even be­fore news Sept. 2 that em­ploy­ers stopped cre­at­ing jobs in Au­gust.

While con­sumers are un­der­stand­ably re­act­ing to bad news about the econ­omy, their re­sponse can be self-ful­fill­ing be­cause con­sumers nor­mally drive about 70 per­cent of eco­nomic ac­tiv­ity. Economists said their pull­back only wors­ens the eco­nomic out­look.

Chris. G. Christo­pher, an econ­o­mist with IHS Global In­sight, said a vi­cious cy­cle al­ready ap­pears to be tak­ing hold, par­tic­u­larly with re­spect to the jobs mar­ket, which is the most sen­si­tive is­sue for con­sumers.

“The econ­omy is in a Catch-22 sit­u­a­tion: Com­pa­nies will not hire at a faster rate un­til they see con­sumers spend­ing more, and con­sumers will not start spend­ing un­til the em­ploy­ment sit­u­a­tion im­proves.”

To him, the Com­merce Depart­ment’s re­port on Sept. 14 that re­tail sales grew by a barely per­cep­ti­ble 0.04 per­cent was proof that “the econ­omy has stalled” and is in dan­ger of suc­cumb­ing to such a down­ward spi­ral.

In fur­ther ev­i­dence that con­sumers are in full re­treat, the Mort­gage Bankers As­so­ci­a­tion re­ported Sept. 14 that con­sumers barely re­sponded to stun­ning drops in the av­er­age rates for 30year and 15-year mort­gages to 4.17 per­cent and 3.40 per­cent, re­spec­tively — the low­est lev­els on record.

Ap­pli­ca­tions to re­fi­nance mort­gages ticked up by 6 per­cent, the as­so­ci­a­tion said, but re­mained nearly 30 per­cent be­low lev­els of a year ago when rates also were ap­proach­ing un­prece­dented lows.

A ma­jor rea­son, an­a­lysts say, is that one-third to one-half of home­own­ers are un­able to re­fi­nance be­cause they owe more on their mort­gages than their homes are worth or have min­i­mal home eq­uity, putting them in the frus­trat­ing po­si­tion of be­ing un­able to take ad­van­tage of the low rates.

That means ul­tralow mort­gage rates no longer suf­fice as they did in the past to en­able con­sumers to pay down their debts and free up cash and spend­ing power so they can make other pur­chases.

Cash-out mort­gage re­fi­nanc­ings fu­eled a ma­jor consumer spend­ing boom in the past decade, but now con­sumers are snowed un­der by the debt they ac­cu­mu­lated.

“The most im­por­tant driv­ing force for our cur­rent econ­omy is that peo­ple will not in­crease their spend­ing un­til their bal­ance sheets are re­paired and their houses are no longer un­der­wa­ter,” said Dean Croushore, an eco­nomics pro­fes­sor at the Uni- ver­sity of Rich­mond.

The huge debt over­hang from the past decade’s hous­ing boom and bust is some­thing “the govern­ment is not able to fix, so we should ex­pect slow eco­nomic growth for sev­eral years to come,” he said.

Mark Vit­ner, an econ­o­mist at Wells Fargo Se­cu­ri­ties, said the consumer shut­down last month was un­ex­pected and shock­ing.

“Zero point zero. It doesn’t get much slower than that,” he said, not­ing that it af­fected re­tail out­lets as well as depart­ment stores, gas sta­tions and auto deal­ers.

The depart­ment also re­vised down to 0.3 per­cent a healthy 0.5 per­cent gain in sales orig­i­nally re­ported for July.

While some spe­cial fac­tors, such as early shop­ping for backto-school clothes and the im­pact of Hur­ri­cane Irene on the East Coast, may ex­plain some of the weak­ness, Mr. Vit­ner said it mostly re­flects the lack of jobs and in­comes to fuel spend­ing growth.

The mas­sive loss of con­fi­dence seen in mea­sures of consumer sen­ti­ment last month took a par­tic­u­larly big toll on bigticket pur­chases such as au­tos, which make up about half of all re­tail sales, he said.

“It’s hard to see what would kick auto sales into a higher gear,” he said. “Con­sumers seem to be re­luc­tant to make ma­jor pur­chases un­til the job mar­ket firms. . . . The credit is there, the con­fi­dence is not.”

National Re­tail Fed­er­a­tion Pres­i­dent Matthew Shay agreed that a lack of con­fi­dence is hold­ing back spend­ing.

“Con­sumers may be wait­ing for good news in terms of em­ploy­ment and mar­ket sta­bil­ity,” he said. They are only “cau­tiously spend­ing on things they need and think­ing twice about things they want.”

James Goldstein, an an­a­lyst at Cred­it­Sights, said that lux­ury re­tail­ers such as Nord­strom’s were less af­fected by the eco­nomic trou­bles — sur­pris­ingly, since the high-in­come con­sumers who shop there in gen­eral are more ex­posed to tur­moil in the stock mar­ket.

“The chal­lenge is in midtier depart­ment stores and in con­sumers that lack the deeper pock­ets seen in lux­ury stores,” he said.

High-end re­tail­ers showed con­sid­er­able re­silience, de­spite “a tu­mul­tuous Au­gust — com­plete with stock mar­ket swoons, de­clin­ing consumer con­fi­dence and both a hur­ri­cane and an earthquake strik­ing fear up and down the East Coast.”

Light consumer traf­fic and sev­eral empty stores at City Cen­ter Mall in Las Ve­gas.

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