To state the story differently: spending on housing, automobiles, furniture, toys, fast food, physicians and dentists–almost everything that is routine and unrevolutionary–has rescued the economy from the collapsed investment in telecom networks and dot-coms and from the depressing effects of fallen stock prices.
The role reversal is stunning. What was the wave of the future has suddenly, and perhaps temporarily, given way to the wave of the past. Consider Whirlpool. Last week it announced that its first-quarter profits will be up 15 to 20 percent from a year ago. In September, just before the attacks on the World Trade Center and the Pentagon, it introduced a new top-of-the-line washer-dryer that sells for about $2,500. Sales have been double the forecasts. It’s no fluke. The Association of Home Appliance Manufacturers reported last week that the industry’s shipments in January were 4.9 percent higher than a year ago. Microwave ovens were up 19.8 percent, refrigerators 16.4 percent.
There’s plenty of action beyond dishwashers. Susan Sterne of Economic Analysis Associates compiles reams of data on consumer-spending patterns. Here are some comparisons between the last three months of 2001 and the same period in 2000: motor vehicles and parts, up 21.9 percent (all changes remove inflation); furniture, up 8.7 percent; beauty parlors, barbershops and health clubs, up 6.1 percent; china, glassware, tableware and utensils, up 5.5 percent; movie tickets, up 5.2 percent; dentists, up 5 percent; casino gambling, up 4 percent; greeting cards, up 4 percent… and sewing goods, up 24 percent.
Of course, not everything improved. Computers and cell phones increased, but at slowing rates. Cosmetics dropped 1 percent. Still, Sterne says, “this consumer recession was almost entirely a travel recession”–terrorism’s aftershock. Luggage sales declined 2.1 percent; hotel and motel spending was down 12.7 percent.
Some commentators (including this one) feared worse: that consumers–worried by weak stocks, high debts and rising unemployment–would cut spending and deepen the recession. Their pullback would compound the drop in business–and especially high-tech–investment. There are many possible reasons that this didn’t happen: American optimism (people simply kept spending); low mortgage rates (they stimulated construction and, through refinanced old loans, enriched homeowners); automakers’ zero percent loans and other sales “incentives”; lower oil and electricity prices; tax cuts.
In congressional testimony last week, Greenspan suggested another explanation, which might be called “trickle-up economics.” By his description and data, the richest fifth of Americans largely powered the consumption boom from the mid-1990s through early 2001. They disproportionately owned stock, and as their paper wealth rose, they disproportionately borrowed and spent. From 1995 to 2000, their savings rate–savings as a percentage of disposable income–dropped from 3.3 percent to negative 2.5 percent. Spending exceeded income. People were borrowing, cashing in stocks or depleting other savings. In this sense, “trickle-down economics” characterized the New Economy.
No more. As stocks dropped, wealthier households curbed spending. Their savings rate rose. In 2001 (through September), it rebounded to a positive 2 percent, says the Fed. Gains in overall consumer spending slowed. But the buying of the lower 80 percent prevented declines. Said Greenspan: “Moderate-income households have a much larger proportion of their assets in homes, and the continuing rise in the value of houses has provided greater support for their net worth [the gap between what they own and what they owe].” Spending from the bottom, instead of the top, sustained the economy.
Some corroboration of Greenspan’s thesis came last week in different forms. Target, the discount chain, announced that its last-quarter profits had risen 19 percent; meanwhile, the jeweler Tiffany said that its quarterly profits had declined 2 percent. Forbes magazine released its annual compilation of the world’s billionaires, reporting that their combined wealth had dropped 11 percent since last year’s rankings and that 83 people (including Steve Case of AOL Time Warner) were no longer on the list.
Of course, the recession could defy its obituaries. Dangers persist. The European and Japanese economies remain weak; the dollar’s exchange rate remains strong. The combination bodes ill for exports. Many industries have surplus capacity. Commercial-real-estate vacancy rates are high. Corporate lenders–banks and bondholders–have suffered big losses from tech borrowers and bankrupt companies like Kmart and Enron. As a result, lenders may be reluctant to lend and corporate investment may be slow to revive. Profits are depressed, and to improve them, companies may continue layoffs. Stock prices may still be overvalued. Higher unemployment and lower stock prices could weaken confidence and consumer buying. Any pickup in manufacturing may slacken once companies have replaced depleted inventories.
Greenspan said he expected any recovery to be “subdued.” Still, he noted that the economy’s “recuperative powers” were “remarkable.” Last fall there were legitimate fears that “a self-reinforcing cycle of contraction… could develop. Such an event, though rare, would not [have been] unprecedented in business-cycle history.” Thanks to the Old Economy, the odds of that have now receded–even if they have not entirely disappeared.
