Those Cautious Consumers

By Julie Connelly

Inflation-battered and recession-weary buyers return slowly to stores

The consumer carries the U.S. economy on his back. He accounts for two-thirds of America's gross national product; and during last fall and winter, he fueled the longest peacetime period of economic expansion in modern times by buying goods that he knew would only cost more next month. This attitude has proved to be right on target. In July, the prices paid by wholesalers rose 1.7% or at a yearly rate of 22.4%. But by the beginning of 1980, consumer spending was slowing down, and when the Federal Reserve Board tightened credit in March, the public put away its plastic. As a consequence, the economy fell hard. Retail sales, which had started to soften in January, plummeted for the next four months by $4.9 billion. In the second quarter of the year, the G.N.P. declined at a startling 9.1% annual rate.

Now some retailers are beginning to see a few wispy signs that the consumer may be again reaching for his wallet. Says Charles Duchen, chairman of Younkers Inc., a department store chain based in Des Moines: "In the past four or five weeks, the consumer has grown more confident. There is a feeling that we have reached the bottom and the worst is behind us." Adds James Zimmerman, president of Rich's in Atlanta: "Back-to-school sales are already very good."

That optimism was reflected last week in retail sales, which were up 2% during July, after an increase of 1.4% in June. More than half the July rise came from autos, as dealers finally began unloading some unsold models; but car sales were still substantially below July 1979 levels.

The Conference Board, a Manhattan business research group, last week also reported a sharp increase in consumer confidence. The monthly survey of 5,000 households had been declining steadily since November 1979, and it hit bottom in May, when only 42.1% felt optimistic about current business conditions and the future of the economy. But Fabian Linden, the director of the survey, reports: "There was a rather marked and surprising increase in consumer spirits beginning in June, and that was repeated more dramatically in July." In those two months, the index spurted 16 points, to 58.1%.

Though July is not normally a strong month for merchants, a number of the bigger retailers managed to ring up good sales on selected items. Unusually hot summer weather had Sears, Roebuck and Co. customers in Chicago snapping up air conditioners and fans. At Macy's in New York City last week, business was brisk in men's clothing and home electronics.

But as sales are being made, profits are going down. Says Thomas Langenfeld of Minneapolis' Dayton Hudson chain: "Customers are responding mostly to clear-cut value and reductions. A substantial part of our sales is being achieved by cutting prices. Profits are being squeezed." Almost all the large chains are feeling the profits pinch. Industry Analyst Stuart Robbins of Paine Webber Mitchell Hutchins expects second-quarter earnings for twelve of the biggest retailers to decline by an average 25% to 30%. Last week J.C. Penney Co. announced that profits for April through June were down 69%, to a negligible $5 million on sales of $2.5 billion. Last week the perennially troubled Korvettes Inc., the retail chain, was saved from probable bankruptcy when its French parent was able to restructure the store's $57.2 million in bank loans. Some suppliers had already halted shipments to the store.

Despite the modest increase in retail sales, it is unlikely that consumer spending will pull the economy out of recession this year, as it did in 1975. Wary customers are still doing most of then" buying for cash rather than on credit. In California the Carter Hawley Hale chain reports that in the first half of the year there was a 2 1/2% drop in credit sales. Consumers in June decreased their debt load by $3.46 billion, after a $3.43 billion drop in May. Any cash left over is now being stashed away in savings accounts. The level of savings, which was down to a paltry 3.5% of disposable income in January, has risen to 4.7%. Says William McDonald of Woodward & Lothrop, a Washington-based department store chain: "Consumers were made to believe it was unpatriotic to buy with credit, and that mood will be very slow to unwind."

Consumers are also likely to remain sluggish spenders because inflation and taxes are taking away such a large hunk of their incomes. The after-inflation real hourly earnings of Americans dropped by 5.6% during the first three months of 1980, the eighth straight quarter that price rises had got the better of paychecks. The tax bite is getting bigger too. Just when the economy is expected to start picking up, a $12.4 billion increase in Social Security taxes will take effect in January. This will raise the amount paid by a family of four earning $25,000 a year by $130 next year.

Concludes Commerce Department Economist Ago Ambre: "The outlook for consumer income in the absence of any big tax cut is pretty bleak."

The American consumer usually has a shrewd and speedy reaction to economic change, and right now he appears to be thinking that the bottom of the recession may have passed. It might be a while, however, before he starts consuming in earnest. Said Rudolph Glin, vice president of Milwaukee's Boston Store: "It's like clawing your way up a cliff with your fingernails. It is still tough to sell, but the consumer is motivated to buy if it is an item of real value." The American customer is currently digging out of debt and is very careful about how he spends his money, but he is also again beginning to cast a curious eye toward shop windows.

With reporting by Patricia Delaney, William Blaylock

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