For keeping the nation's economy alive during the last few years, American consumers ought to win a Bronze Star for valor. But there are growing signs that the soldiers are battle-weary and retreating from the field.
Richard D. Hastings, chief economist at Cyber Business Credit, a retail advisory firm in New York, says consumers have begun curtailing their spending, and he expects them to keep cutting back in the coming months. Because corporate spending remains moribund, a retrenchment by consumers would further hobble an already-limping economy.
With consumer debt near record highs, it would not be much of a surprise if consumers did stop buying. But they have been remarkably resistant to changing their bingeing ways. Even the devastating bear market in stocks has not shaken them.
That may soon change, Hastings said, for two reasons. First, he believes that because prices are no longer dropping for raw materials _ and are even rising for some, like oil and cotton _ shoppers may start seeing higher prices on goods. Accustomed as they are to ever-bigger bargains, and given how many cars, computers, sweaters and electronics gear they have bought in recent years, consumers may well commence a buying strike. "As prices came down, that created a bargain effect," Hastings says, "and consumers kept spending even though so much wealth was destroyed in the bear market." A strong dollar made imports cheaper as well.
Also worrisome is a shift in the source of the funds available to consumers. In the 1990s, Hastings says, consumer spending was fueled by growing wages, a secure job environment and gains in real estate and the stock market. But since mid 2000, consumer spending has been bolstered by mortgage refinancings, home equity loans and falling retail prices. None of those sources can be relied on much longer.
"I have seen a more significant breakdown in consumer spending during the last few months," Hastings said. "While consumer spending in dollars looks okay, when you look deeper, there are trouble signs. And that is likely to turn into lower unit volume pretty soon."
Two early warning signs of a consumer slowdown, according to Hastings, are sales at chain drugstores and a decline in growth at Wal-Mart stores open a year or more.
Performance at chain drugstores reflects the attitudes of lower- and middle-income consumers, he explained; they are typically the first to cut their spending. A downturn began among these shoppers last spring and has accelerated. The most recent available data show sales at chain drugstores fell 3.7 percent in December, compared with the month a year earlier, 1.3 percent in January.
The sales trend is also down at Wal-Mart. Growth at this powerhouse retailer used to run about 6 percent a month, on a comparable-store basis. Now it is averaging 2.5 percent.
"The risk is, what else in the economy can pick up the slack if the consumer no longer participates enough?" Hastings asks.
Certainly not businesses, which are reducing their expectations based on sluggish demand.
State and local governments cannot help. Short of cash, they must cut their spending. Only the federal government is expansive.
Household wealth is in decline, Hastings says, and so is the number of people employed. Consumers are finally figuring out that the only way to save money in such an environment is to stop spending. For many investors, this is a new game _ with consequences that are anything but happy.