he economy has lost a net 1.8 million jobs since January 2001 and real wages have been stagnant, but you’d never know it from the pace of household spending.
Of course, that’s been good news for apparel retailers and wholesalers, and part of that growth has been due to lower taxes, but a massive chunk has come from an industry far afield from fashion: mortgage refinancing.
With interest rates at a 47-year low and house prices skyrocketing, homeowners have put more than $1.6 trillion in their pockets by refinancing over the last five years, giving an enormous boost to the economy. In the words of wonky Washington Monthly magazine, Americans have been using their homes like ATM machines.
But every refuge has its price. With the economy finally heating up, a hike in interest rates is almost certain, and is a real possibility as early as this summer. The specter of higher interest rates isn’t just playing havoc with apparel retailers’ and wholesalers’ share prices, it’s threatening their top and bottom lines by turning off the spigot of consumer cash from refinancings.
According to Britt Beemer, chairman and founder of America’s Research Group, the average consumer who refinanced his mortgage gained 12 to 14 percent in additional spending money. Some of that went for home improvement, to pay off credit cards and for college tuition, but a great deal also went to consumer spending.
As Goldman Sachs analyst Matthew Fassler cautioned in a research note: “We expect contributions from mortgage refinancings to consumer spending in 2004 to decline from high 2003 levels, given higher mortgage rates and flagging refinancing applications. Cash-out refinancing is only one component of our broader macroframework, but the declines in cash-outs do not help the consumer.”
Fassler warned the lack of support from cash-out refinancings and fiscal stimulus from the federal government will act as a drag on consumer spending starting this summer.
“The second-half 2004 outlook is more ominous,” said Fassler, “as fiscal restraint [no more tax checks in August] takes over and cash-out refinancings cycle very tough comparisons.”
To put the drop-off in perspective, according to the Mortgage Bankers Association, refinancing this year is running about 80 percent below its peak of $2.5 trillion in 2003, and the average interest rate on a 30-year mortgage is now more than 6 percent. Shortly after the boom started in 2001, a 30-year mortgage could be had for just more than 4 percent.
“The refinancing bus has left the station,” said Beemer. “If you haven’t refinanced by now, chances are you’re not going to unless you have a very high mortgage.”
That means fewer consumers are adding to overall spending by pulling cash out of their homes. In other words, that pie is about as big as it’s going to get. With the national savings rate already at a historical low of about 1.9 percent, apparel companies will need sustained employment and wage growth in the economy to put increasing amounts of consumers’ cash into their coffers.
While the most recent jobs data is encouraging, rising employment and wages are a double-edged sword for apparel companies. Higher wages may lead to greater consumer spending, but they may also lead to higher costs.
Testifying before the Senate’s joint economic committee last month, Federal Reserve chairman Alan Greenspan said, “If history is any guide, competitive pressures, at some point, will shift in favor of real hourly compensation at the expense of corporate profits. That shift, coupled with further gains in employment, should cause labor’s share of income to begin to rise toward historical norms.”
It is precisely that inflationary feedback cycle — higher employment equals higher wages equals higher costs equals higher prices equals higher wages — that the Fed will try to forestall by raising interest rates.
But the forecast need not be as gloomy as all that. Apparel retailers and wholesalers can exert a great deal of influence over their top lines by keeping their focus on what they should do best: fashion.
As Lissa Baum, executive vice president at IDB Bank, pointed out, apparel sales have been woeful for much of this period of rock-bottom interest rates. “The weakness in apparel wasn’t related to interest rates,” Baum argued. “It was related to fashion. Interest rates were low and people didn’t buy. For years, all that changed were the lengths and the seasons. There has been a reemergence of fashion. and that has led to a need for women to update their wardrobes.”