NEW YORK — A strong holiday season would only add to expectations of a stronger economy in 2004, but economists and analysts worry that any rebound will be short-lived without a better job outlook.
Despite Saturday’s snowstorm — which ultimately should not have a major impact on sales — economists expect a solid holiday. That, coupled with election-year politics, is likely to give the economy a strong start in 2004, but consumers won’t allow it to carry into 2005, experts say, unless there’s real progress in job creation and other fiscal fundamentals.
This story first appeared in the December 8, 2003 issue of WWD. Subscribe Today.
Optimism is limited and somewhat fragile, they note. Just as expectations for the holiday season rose with a strong Black Friday performance but fell with last week’s reports on November retail sales, rays of sunshine on the economic landscape could be eclipsed by dark clouds if consumers don’t see convincing evidence that the bounce back from an economic slump is real.
While recent data about jobs and gross domestic product have provided hopeful signs about the nation’s finances, an uneasy feeling remains among consumers and those who study their behavior. That nervousness was underscored last month, when retail figures for November revealed strength at the high end but weakness among low- and middle-income consumers as Sears, Roebuck & Co., Kohl’s and other moderate retailers failed to meet analysts’ expectations, their own plans or both.
December may very well produce the 4 to 5 percent gains in holiday sales that many anticipated for the holiday season, but that won’t alter deep-seated uneasiness about jobs, household finances or unsettling political news from overseas.
“That uncertainty will carry through most of 2004, without any dramatic robust growth in numbers over 2003,” predicted Andy Moser, senior managing director of GMAC Commercial Finance, Retail Finance Group. “Will consumers be willing to take on more debt next year? Yes, and that means that economic growth will be fueled by consumer debt. But consumers will remain nervous right up through the election.”
He expects some election-related job creation, “but not anything significant,” and professes concern about real wage growth, the principal generator of discretionary spending.
“My great fear,” he added, “is what happens in 2005. It will be a post-election year, and it is hard to imagine what we will see economically because there’s still an unknown regarding the presidency.”
Moser noted that, while the numbers coming out of Washington look better, retail and apparel executives remain cautious. They hear about economic growth, but “they haven’t seen it yet.”
Walter Loeb, a retail consultant of the firm that bears his name, said, “I am convinced that 2004 will be a good year. We’ll be in an election year so you expect some pump priming someplace in order for President Bush to get reelected.
“My concern is afterwards, in 2005. I am more concerned about consumer spending in 2005 than in 2004. Unless we see more capital spending by businesses and more pump-priming from the government, the roadmap isn’t very clear.”
Loeb said he’s yet to see either significant job creation or the levels of capital spending needed to sustain GDP growth. The latest data available suggests the economy will grow vigorously in the fourth quarter after its robust 8.2 percent advance in the third.
However, more than 2 million Americans remain unemployed for 27 weeks or more, according to the Bureau of Labor Statistics. U.S. job-cut announcements dropped in November to 99,452 jobs lost versus 171,874 in October, according to Chicago-based Challenger, Gray & Christmas. Yet, initial applications for U.S. jobless benefits unexpectedly rose during the Thanksgiving week, with the number of Americans claiming benefits rising to 365,000 from a revised 354,000 in the prior week.
Employment statistics are often a lagging indicator but there are still nearly 9 million people unemployed, and non-farm payroll growth last month increased by just 57,000, far short of economic forecasts of 150,000. The number of jobs needed each month just to stay even and keep unemployment at 6 percent is 150,000.
A further concern is the Temporary Emergency Unemployment Compensation program. After two extensions, the program, which has provided about $900 million a month in benefits to those whose state-paid stipends have ended, is set to expire at the end of the month barring another extension.
According to Loeb: “A consumer without benefits will be a very unhappy person who will not be spending in the stores until there is a job in hand.”
Andrew Jassin, co-founder of consulting firm The Jassin-O’Rourke Group, believes consumers have very little confidence in the security of their jobs, and with the first of the Baby Boomer generation getting ready for retirement in a few years, more will become concerned with medical costs, retirement assets and Social Security payments.
“A good amount of thought on where to spend their disposable income will be focused more on nonfashion items, such as improving the quality of their standard of living,” Jassin said. “They want to eat well, be healthy and travel. Those dollars have to come from somewhere, and it will be coming out of fashion to a large degree.”
If priorities are shifting for those discretionary dollars against a backdrop of government statistics that say productivity is at an all-time high, should Americans regard the economy as improving? Has the U.S. economy actually moved into a “hot zone” of a cyclical recovery? Perhaps it has for the short term, but the long-term picture is less clear.
Stephen Roach, chief economist at Morgan Stanley, wrote in a research note: “In a classic preelection gambit, Washington has pulled out all the stops in order to resuscitate what had been an unusually sluggish economy. On the surface, the returns appear most encouraging, 8.2 percent GDP growth in [the third quarter of 2003] and vigorous follow-through in the monthly data that points to spillover into the 4 to 5 percent range in [the fourth quarter].
“While it’s tempting to extrapolate into the future on the basis of this seemingly spectacular upturn, there’s still good reason to be cautious, in my view,” he stated. “Two related issues keep me awake at night — the quality and sustainability of this rebound. On both counts, I worry that the U.S. will ultimately pay a steep price for squeezing too much out of an unbalanced economy.”
Roach noted in the same report that America’s net private saving rate for consumers and business combined, net of depreciation, is 5 percent of GDP, well below the 9 percent average in the Sixties. In contrast with the past, America also is now more dependent on foreign savings to fill the void, leaving open the possibility that we may see higher interest rates in order to adequately compensate foreign investors for keeping their investment money on our shores.
Of course, any spike in interest rates would impact what Roach believes is another problem in our economic system: American households have led the charge in using debt to drive the U.S. economy.
He explained that during the latter half of the Nineties, American consumption shifted from being income-driven to one that was increasingly wealth dependent. Once the equity bubble popped with the technology bust, wealth shifted toward the property markets. The difference, he noted, is “profound” because the former, apart from margin debt, is funded mostly from a psychological sense of well-being. In the latter, mortgage debt and frequent refinancing are the principal means of extracting incremental purchasing power from housing assets.
For Roach, the new cultural phenomenon of excess leverage may mean that the ultimate post-bubble payback may be all the more severe, particularly if the U.S. current-account deficit sparks the consequences of higher interest rates.
Roach concluded in his report: “America’s newfound cyclical vigor is hardly an accident. Washington has learned an important lesson from the early Nineties. Eight years ago, the credo was, ‘It’s the economy, stupid.’ This year, it’s, ‘It’s politics, stupid.’ Deep in our hearts, we all know predicting the future is next to impossible. It stretches the imagination to conjure up a macro scenario that is based on an exquisitely timed interplay of political and economic cycles.