> Rob Schaap wrote:
...
>
> >Methinks stuff can still go very wrong while the US depends on credit and
> >the world depends on the US.
>
> Could, yes. Might not, though.
>
> Doug
>
The Christian Science Monitor piece said that consumers were putting off big purchases in the first quarter, but did not mention that consumer debt was nonetheless shooting up at the same time. This Reuters piece spins the other way.
john mage
April 30, 2001
Debt Plus Jobless Rise Spells Trouble
By REUTERS
Filed at 11:49 a.m. ET
NEW YORK (Reuters) - An ever mounting pile of consumer debt, once seen as a sign of confidence in the economy's long expansion, could soon spell trouble for the cooling economy as the jobless rate rises, economists said.
Total consumer credit grew at a 10.5 percent annual rate in February after growing at a 12.5 percent rate in January, according to the Federal Reserve.
In contrast, from 1996 through 2000, consumer debt grew at 7.9 percent, 4.4 percent, 5.4 percent, 7.1 percent, and 9.5 percent rates, respectively, Fed data show.
Normally, increased consumer credit is a sign of strong consumer confidence and strong spending, said Brian Nottage, senior economist at economy.com., a macroeconomic consulting firm in Philadelphia.
But now that confidence is on the wane and consumers are worried about employment trends.
The Conference Board, a business research group, reported that the number of consumers asserting that jobs were ``hard to get'' rose in April while the portion reporting that jobs were ''plentiful'' fell.
And consumers' income outlook also soured, with the number of consumers expecting an increase in their paychecks over the next six months down to 22.1 percent in April from 23.4 percent in March, the group said.
``What we're seeing in terms of credit card usage now does not reflect strength,'' said Nottage. ``People are using their credit cards to tide themselves over.''
Goldman, Sachs & Co. financial analyst Richard Crump agreed, describing the recent acceleration in consumer credit growth, coinciding with diminished consumer confidence, as a potential sign of consumer distress.
And for an economy in which consumer spending accounts for two-thirds of economic activity -- and with business spending also in a slump -- consumer distress could tip the economy into a deeper downturn, economists said.
Crump said in two of three episodes since 1969 when consumer credit growth accelerated as consumer confidence declined, the result was a ``severe'' drop in consumer spending.
The crucial element in avoiding that outcome appeared to be what happened to real disposable income growth, which in turn depended on the performance of the labor market.
If a resilient labor market is the shield against a further slowdown in consumer spending, the government's latest report on jobless claims was not reassuring.
The government said on Thursday that initial jobless claims rose by 18,000 to 408,000 for the week ended April 21, their highest level in more than five years. The government will release its April jobs report on Friday.
Ian Shepherdson, chief U.S. economist at High Frequency Economics, said claims are high enough to point to a 5 percent unemployment rate by the end of the summer.
``We're all watching weekly jobless claims numbers because wages are 70 percent of income,'' said Stan Shipley, economist at Merrill Lynch & Co.
FED RATE CUTS SHOULD AID CONSUMER, BUT WAGES KEY
Shipley said the Fed's four sharp interest rate cuts in 2001 should help keep consumer spending strong by lowering the cost of consumer installment debt.
Lower mortgage rates are also vitamins for the consumer.
``Mortgage rates are down sharply so people can refinance their homes; that provides extra disposable income to households,'' said Shipley. ``If I have more money in my pocket, then I can buy more goods.''
But economists say rate cuts, and even a feistier stock market with attendant wealth gains, will not foster strong economic growth in the absence of a healthy labor market.
``The labor market holds the key,'' said Crump.
Crump cited three episodes which, like the present, were marked by strong credit growth and declines in confidence: 1969, 1972-73 and 1977-78. The first two episodes ended in recession; the third did not.
In all three episodes, falling share prices created declines in net worth. But what determined which episodes ended in recession and which did not was the level
of real disposable income growth, which depends on the labor market.
In the first two cases, real disposable income growth weakened. In the 1977-78 period, however, real income growth rose steadily and remained strong thereafter.
The fallout for consumer spending was that consumer spending fell markedly during or after the periods of the first two cases but fell only mildly in the third case, Crump said.