Businesses and consumers will generally find themselves able to obtain credit this year.

NEW YORK — Against the specter of rising interest rates, one view seems certain: There will be no credit crunch this year.<br><br>That was the conclusion among several financial experts, who said that both businesses and consumers will generally...

NEW YORK — Against the specter of rising interest rates, one view seems certain: There will be no credit crunch this year.

This story first appeared in the January 12, 2004 issue of WWD. Subscribe Today.

That was the conclusion among several financial experts, who said that both businesses and consumers will generally find themselves able to obtain credit this year. The additional good news for the retail industry is the expectation that consumers will continue to spend freely throughout 2004. The experts said that even if rates rise, they have been so low that incremental increases wouldn’t cause any major hardship for consumers to service their debt loads.

David Joy, vice president of Capital Markets Strategy for American Express Financial Advisors, observed, “There is a healthy degree of underlying momentum in the economy right now, with an important component being health in the consumer sector.”

He said there’s a general expectation already built into the financial markets that the policy-making Federal Open Market Committee of the Federal Reserve Board will raise rates by one-quarter of a percent by June, and another second similar increase will occur by September. Joy observed the markets are viewing the increases as a natural progression toward a neutral monetary policy, confirming the view that the economy is strong enough to stand on its own.

Short-term interest rates are currently 1 percent. The FOMC said on Dec. 9 in a statement that it “continues to believe that an accommodative stance of monetary policy, coupled with robust underlying growth in productivity, is providing important ongoing support to economic activity. The evidence accumulated over the intermeeting period confirms that output is expanding briskly, and the labor market had appeared to be improving modestly before December employment figures clouded the outlook. Increases in core consumer prices are muted and are expected to remain low.”

Joy said, “I think access to capital should be plentiful for qualified borrowers, and interest rates will be generally fairly attractive for the balance of this year. [Businesses] at the lower end of the quality spectrum can expect some tightening, but that is also consistent with an expanding economy.”

Susan H. Ding, credit analyst at Standard & Poor’s, doesn’t foresee any problems in the textiles and apparel sector. “There shouldn’t be any credit issues for the textiles firms since any that were present have already surfaced. Almost all have asset-based type of lending arrangements. Advances are against receivables and inventory and the structure of those facilities are tight. As for apparel firms, a rise in interest rates could present some problems for the smaller, poorly performing firms, but so far we don’t anticipate any major problems. [If] the credit gets tighter, we [expect to] see the smaller companies benefit as many become acquisition candidates.”

Stanley Officina, president of Sterling Factors, said, “Business will be good. I’m particularly optimistic about 2004. I like the way the economy is shaping up and the way our clients are handling inventories. The last few years forced a whole generation that has never been through hard times to hear the wake-up call for a change in the way they think. We’ve seen firms pay more attention to their finances, inventory levels and customer base. The recent economic downturn has been a fabulous education tool for many managers.”

While an unforeseen event or “shock” could cause a tightening of credit, Officina cautioned that such a surprise wouldn’t necessarily mean a ripple effect throughout the entire credit market.

“The interesting thing that many people don’t realize is that we as a company and those at other firms [similar to us] don’t tighten credit across the board. We don’t make decisions to pull back credit or to review potential clients or customer base any differently, whether in good times or bad. Each part of the process is the same, whether to grant credit or not, and is a consequence of what that customer has done in running the business,” Officina said.

As for consumers, he observed: “For whatever reason, interest rates in our area don’t drive consumer credit at retail. People don’t know if it is 19 percent from years ago or the recent 4.5 percent rate. A rise in interest rates will push mortgage rates higher so you’ll see maybe a slight pullback, but that will still put mortgage rates well below what it has been for the last few years. Right now the cheapest thing to do is borrow money. That’s true on the corporate side, as well.”

According to Officina, it doesn’t matter whether consumers are holding a minimum wage check or a Wall Street bonus. “Everyone has disposable dollars and are buying necessities such as food and home care products. That isn’t really going to change,” he said.

In a soon-to-be published report, “Election Year Economics,” by Deloitte Research, chief economist Carl Steidtmann noted that every so often, maybe once or twice in a generation, the economy booms.

“This is one of those times. The last time this happened was in 1984 when the combination of tax cuts, military spending increases, falling interest rates and falling gas prices set off an economic boom. Despite worries about terrorism, the economy is in a full-fledged boom again. The 8.2 percent growth in the third quarter was dismissed as a one-time affair. It now appears that growth in the fourth quarter was stronger than expected as well, probably in the 5 to 6 percent range,” the economist wrote.

Steidtmann also sees the employment picture looking bright — adding 2.5 million new jobs for the year — as the country heads toward the end of 2004, where the “problem facing employers will not be whether or not to hire more workers, but where to find good-quality job candidates.”

He sees the recovery starting with the lowest unemployment rate and the highest labor market participation rate of any recovery in the past 35 years. A tighter labor market, he foresees, points to faster wage growth, a positive for consumer spending.

Deloitte’s leading index of consumer spending, according to the report, is at a level not seen since 1984, the last time the economy moved into a boom. Back then, a key driver of the boom was consumer spending. For 2004, larger-than-expected tax refunds will help begin the year with more cash in consumers’ pockets. As for a potential housing bubble, Deloitte doesn’t see that happening because of strong growth in the second home market as Baby Boomers consider their retirement options. Further fueling consumer spending is an expected stimulus from lower oil prices this year as non-OPEC areas increase production.

At a New York Society of Security Analysts panel discussion here last week, “Semi-Annual Market Forecast: The Yogi Berra Bull Market,” Elizabeth Ann Sonders, chief investment strategist at Charles Schwab & Co., also said consumers will keep on spending.

She noted that while the money won’t be as easily made in 2004 as it was in [the] hindsight [of] 2003, the expectations for the year are still “positive….I strongly believe that this is the beginning of a new secular bull market.”

Although there will be more volatility in the market, she noted, there will be continued strength throughout the year.

“The death of the consumer is greatly exaggerated. That’s not saying consumers are in good fiscal shape, but they surprised us in the last [few] years. The debt level is a risk, but the consumer will hang in there. There is also potential for income going up as the jobless rate declines. The consumer won’t fall out of bed anytime soon,” Sonders said.

The Federal Reserve said earlier this month that consumer debt grew by $4 billion in November, half the pace of October, as shoppers charged fewer purchases. Auto financing accounted for most of the 2.4 percent increase in nonmortgage credit, measured at an annual rate. Total consumer debt, including auto loans and credit cards but not mortgages, rose to a record $1.98 trillion in November, according to the Federal Reserve. That translates to about $18,700 per household.

Consumers may keep on spending, but there seems to be some question over where their dollars are being spent.

WSL Strategic Retail president Wendy Liebmann said that in a survey her firm conducted in early November, “There is a reticence on the part of shoppers today, even though we’re seeing improvement in the economic measures. Whether it is concern over the job picture or a drop in their retirement funds, people are looking for value. Many haven’t recouped their retirement losses yet and if they have money to spend, they can wait until the item is on sale.”

She said consumers as a group “do have money to spend, but the willingness to spend it is only when the price is right and the item is great.”

Liebmann expects consumer spending to remain OK, although it may be tougher for retailers to grab market share for those same dollars. Teen retailers, she said, will continue to do well if they have the right merchandise, while midlevel department stores will continue to “fall into a chasm.” Consumers with money can wait for the sales, while those looking to stretch their dollars are likely to head to Wal-Mart and Target, Liebmann said.

Vendors, she noted, will have a harder time than retailers because many rely heavily on the department store as their primary distribution channel.

Specialty retail analyst Tom Filandro at Susquehanna Financial Group also said that consumers are likely to remain cautious, as far as their apparel purchases are concerned. “Wardrobing is less important in one’s life now, but we think that we are at the bottom of that cycle.”

While fashion hasn’t been driving their purchases, Filandro expressed optimism that spring fashion choices will change that. He expects that consumers will continue their spending as some trade up to “affordable luxury” goods, while at the same time others will continue their penny-pinching and driving sales at the discount arena.

“A lot will depend on real wage growth and if that surges, it will lead to an increase in consumer buying power. Specialty retailers need to be more innovative and more fashion-forward. They need to send a message to consumers that they need to update their wardrobes, otherwise that real wage growth will travel to the discounters,” Filandro concluded.