ANALYSTS: AFTER A SLUGGISH START, ECONOMY SHOULD SHOW GROWTH
Byline: CAROL EMERT
WASHINGTON — The mass market end of the beauty industry won’t get much of a goose from the economy this year — although the luxury sector may continue to benefit from the ongoing stock market boom, according to economists.
Despite a sharp slowdown in the first quarter, slow-to-moderate economic growth is predicted for 1996 as a whole. Economists interviewed forecast an increase in gross domestic product — the total of all goods and services produced in the U.S. — of about 2 percent, compared with growth of between 2.2 percent and 2.5 percent in 1995.
Personal spending will slow disproportionately, particularly in the first half of the year, as consumers attempt to pare down credit card, auto and other installment debt, the economists concurred.
Donald Straszheim, chief economist at Merrill Lynch & Co., estimated that after removing the affects of inflation, consumer spending will grow 1.9 percent in 1996, compared with 2.4 percent in 1995.
Consumer debt is at record high levels. In 1995’s third quarter, the latest period for which data was available, personal debt excluding mortgages totaled 18.5 percent of disposable income, according to Robert D. Barr, deputy chief economist of the U.S. Chamber of Commerce. That’s the highest level recorded in the Chamber’s database, which goes back to 1959.
At the beginning of the 1990 recession, by contrast, the debt-to-income ratio totaled only 17.6 percent. That recession was largely caused by a slowdown in personal expenditures, Barr noted. “I don’t expect consumers to be big contributors to economic growth in the first two quarters,” he said.”It will feel very sluggish.”
While agreeing that economic activity will be languid in the first half of 1996, Donald Ratajczak, director of the Economic Forecasting Center at Georgia State University, noted that the consumer debt picture is less dire when debt is viewed against an individual’s total assets, rather than against income.
Assets are growing faster than income because of the sharp increase in the value of equity investments over the last year, Ratajczak said. Capital gains should strengthen consumers’ spending power, particularly for high-income people who own more equity investments.
A recent flurry of mortgage refinancings should also help generate excess cash to bolster spending in the second half, said David W. Berson, president of the National Association of Business Economists and chief economist at Fannie Mae, the Washington-based mortgage firm.
“In 1993, homeowners saved an estimated $12 billion to $15 billion from mortgage refinancings, and they spent a lot of that in 1994,” Berson said. “I could see half that amount saved in the current period, which would add to spending in the latter half of 1996 and early 1997.”
Consumers aren’t the only ones who overdid their spending in 1995 and are curtailing expenditures in the first half. Businesses, too, misjudged demand and stockpiled more goods than they needed.
Businesses have been attempting to correct their inventory surpluses since 1994’s second quarter, when stockpiles totaled $74.5 billion at an annual rate. The downsizing of the federal government could also continue to put a drag on the economy this year. On top of planned spending cuts, the current budget impasse between the White House and Congress has left some federal programs with only a fraction of their regular funding. Some agencies are being closed for lack of funds.
The lack of a budget agreement “will cause a significant fiscal slowing, even without a balanced budget agreement,” noted Barr.
But despite all of the brakes on the economy in the first half — exacerbated by government shutdowns and industry-stopping weather — the chances of a recession this year are only between 20 and 25 percent, according to Berson’s calculations.
“The problem with getting close to zero growth is that it doesn’t take a big shock to send you into negative territory,” said Berson.
But a recession is unlikely, barring a substantial jump in oil or food prices or some other shock to the economy, said Berson. “Particularly if the Federal Reserve continues to ease [short-term interest rates], as I expect them to, it should mean growth will at least be modest.”
Straszheim also considers a recession unlikely, but possible. If the economy does begin to contract, upscale shoppers will be cushioned somewhat by their capital gains. However, upscale stores and brands would still be impacted by a shift of more cost-conscious middle class shoppers to the mass market.
“The high end is not recession-proof, although it’s less vulnerable than the low end,” said Straszheim, who studies consumer spending behavior. “People cut back at all levels.”
And while there may be a trend during lean times of consumers purchasing small luxuries, such as cosmetics, to make up for larger sacrifices, that trend is probably not enough to make up for a real economic slowing, Straszheim added. “Overall, [high-end brands] will still get hurt” by a recession, he said.
Even the hint of recession should be over by the summer, when economists expect much of the bad economic news from the first half to begin to reverse.
Inventory and consumer debt levels should be largely corrected by then, Straszheim said, freeing up funds for spending.
By midyear, middle-class consumers in particular should feel the effects of declining interest rates and an expected drop in oil prices, brought on by the freeing of supplies from Iraq, said Carl Steidtmann, an economist and director of research for Management Horizons, the retail consulting arm of Price Waterhouse.
Americans may also have more cash due to a $500-per-child tax credit favored by the White House or capital gains tax relief sought by Congress, although it is not clear when or whether such measures would go into effect.
An expected boom in the export sector should further bolster the second-half economy, as major trading partners including Europe, Mexico and Japan are expected to recover from significant periods of weakness.
Export growth will increase job creation in the manufacturing sector and boost average incomes, which means more money will be available for spending on consumer products, said Steidtmann.
Steidtmann is expecting as many as two million jobs to be created domestically this year, compared with the 1.5 million created in 1995. Job creation is the primary factor in income growth, he noted: “I would expect mass market shoppers to be in a better spending mood in the second half.”
The recovery in Japan should also mean more Japanese tourists in the U.S., a phenomenon that would particularly benefit high-end retailers, Steidtmann said. While the dollar’s recent strengthening against the yen may dampen this trend, the dollar’s value is still low when viewed on a historical basis.
All in all, he said, “I expect Christmas 1996 to be a pretty good Christmas for retailers.”