Come On, Big Spender!

By John Greenwald

Retailers hope that consumers will display their freewheeling ways Money does not stay long in Patricia Goodson's pocketbook. Says the manager of a fashionable women's clothing shop in Los Angeles: "If I want something, I'll buy it. My husband and I just bought a brand new Datsun 280-ZX sports car. I feel like I might not be here the day after tomorrow, so I want to enjoy things now."

American retailers wish there were a lot more people like Patricia Goodson around these days. Such a free-spending attitude would help lift the economy from the painful recession that has gripped the U.S. since last July. Economists agree that the consumer is the most important factor behind the rebound that many expect to start in the summer. Says Robert Ortner, chief economist for the Commerce Department: "The consumer is going to have to bring us out of this recession. The other major sectors of the economy aren't going to contribute much, if anything."

There are now a few signs that people might be willing to lead the way out of the slump. Spending rose sharply at department stores and picked up in automobile showrooms in the spring as falling inflation stretched the buying power of the dollar. Retail business was up a strong 1.5% in May, after increasing .7% in April. Shoppers are spending, in particular on clothing and entertainment-oriented electronics products like video recorders and video games. Says Avery A. Haak, corporate economist for Dayton Hudson Corp. of Minneapolis, the seventh largest U.S. retailer: "I see some evidence that the consumer is spending more freely." Adds Richard D. McRae Jr., executive vice president of the twelve-store McRae's department-store chain based in Jackson, Miss.: "We have seen a big improvement in sales in the past three to seven weeks. There has been an across-the-board increase of 20% in apparel, which is about 80% of our business."

The Conference Board, a New York City-based business research organization, reports that its widely watched index of consumer confidence advanced in May for the second month in a row. Said the Board: "Consumers have clearly turned more confident about the future course of the economy." The University of Maryland reported that its semiannual consumer survey showed that a surprising 39% of the public felt their personal finances would be better off a year from now, while only 14% thought they would be worse off. A large 41% believed they would be about the same.

Part of the reason for the unexpectedly strong consumer buying is that real spendable incomes, which often drop in a recession, have increased during this one. Last year's small tax cut, plus the sharp decline in inflation, has meant that the spending power of the typical U.S. consumer has actually increased 1.2% since the beginning of the year. Figures released last week show that personal income rose .7% during May.

As a result, many people are able to keep on buying despite the recession. Anne Harris, who lives in New York City and is retired, was visiting Los Angeles last week. Said she: "I'm spending about the same as before the recession. I'm getting new carpeting in my house and a new refrigerator. I'm going ahead and getting them now."

There were a few tentative signs last week that the recession might be coming to a close. Commerce Secretary Malcolm Baldrige predicted that the gross national product would actually show a slight rise in the second quarter. It had declined at an annual rate of about 4% during the previous six months. The Commerce Department reported that housing starts surged 22.3% in May, the biggest jump since June 1980.

Nonetheless, many consumers remain in a mood of wary waiting. Although the Federal Government will start putting $50 billion into the economy in July in the form of income tax cuts and increased Social Security benefits, not everyone is going to rush out and spend the money. Says Samuel Zervitz, an official with the Baltimore school system: "The tax cut is gasoline money. It's cigarette money. It doesn't mean a thing."

Many people, of course, are unable to increase spending because of the recession, which pushed unemployment 9.5% in May, the highest level since the beginning of World War II. Priscilla Mantle's husband lost his job as regional manager of a truck-leasing firm in Dallas two months ago. Says she: "I haven't got a spare dime to my name. I've cut back all my spending on anything that isn't absolutely necessary. I'm even cutting down on food. We're able to make our house payments and all that, but it's very close."

The hangover from past inflation is also keeping many people away from shopping. Although consumer prices have been increasing at an annual rate of less than 2% since the beginning of the year, many people still do not believe that the inflationary fever that raged during much of the 1970s has subsided. Says Kay Cooper, a receptionist in a Manhattan optometrist's office: "I don't see inflation coming down at all. It still costs a fortune just to use the subway and the bus." Adds New York Businessman Alfred Sandberg: "You feel that if you don't buy something today, tomorrow the price will go up."

The continuation of that inflation psychology helps explain why the U.S. savings rate has not increased much during this recession. In most past economic slides, Americans, fearful for their jobs, usually started putting away more money in order to create a financial cushion. During the 1973-75 downturn, for example, the savings rate rose to more than 8.5%. But Americans saved only 5.5% of their earnings during the first quarter of 1982, and the level increased to just 6.3% in April.

While consumers have generally been big spenders in the past two months, some economists doubt that they will be able to keep that up much longer. Argues Michael Evans of Evans Economics, a Washington, D.C., forecasting firm: "This is a year of caution and retrenchment. Without a substantial decline in interest rates, it is very difficult to see how consumption can keep rising." Other economists point out that plunging home prices are likely to depress spending. Moreover, rising state and local levies will probably diminish the stimulative effects of next month's federal tax cut.

Retailers say that high interest rates remain the main factor holding back consumers. While Americans now seem willing to continue spending for routine items, they are reluctant to take on such important purchases as homes and furniture. Says Patrick H. Carigan, a civil engineer living in a suburb of Cincinnati: "Interest rates are the key. People are going to buy only what they think is essential until interest rates moderate. I'm spending more these days, but big-ticket items are going to wait until lower interest rates." Consumers may spend enough to pull the American economy out of the mire of recession, but a sustained recovery is unlikely without some substantial relief on interest rates. --By John Greenwald.

Reported by David Beckwith/Washington and Lee Griggs/Chicago

With reporting by David Beckwith, Lee Griggs

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