Have American consumers finally emptied their purses? Economists have debated that question for a few years now, and for Paul Kasriel, the answer today is "maybe yes."
As evidence for this conclusion, Mr. Kasriel, director of economic research at the Northern Trust Co., a Chicago bank, looks no farther than Harley-Davidson Inc. Last week the fabled motorcycle manufacturer announced that it was cutting back shipments of its machines and its earnings forecast for this year. Apparently too many 2005 models are cluttering dealer floors.
Kasriel wonders if aging baby boomers - big buyers of these powerful bikes - are closing their wallets. They may be investment bankers or lawyers during the week, but on weekends, they become Walter Mittys. Donning studded leather jackets and bandannas, they mount their macho bikes to roar down America's highways.
But the drag in sales involves more than just motorcycles. Last Wednesday, the Commerce Department said retail sales in March rose a mere 0.3 percent to $339 billion, growth decidedly below the forecast of Wall Street economists.
So what is behind the apparent shift in spending? Economists point to five key factors:
• The nation's net national savings rate has plunged to a record low of 1.5 percent of total gross domestic product, its output of goods and services, since early 2002. The federal government is running deep in the red. American businesses are doing better. But consumers are racking up bigger and bigger credit-card bills. As one result of the shortfall in domestic saving, the nation is running a record trade deficit and a current account deficit exceeding $600 billion. In essence, the nation is splurging. It's piling up debts abroad, buying more and more Japanese cars, Chinese toys, and clothes, etc.
• Oil prices are about quadruple those of late 1998 - a drag on other consumer spending.
• Job growth slowed in March. Only 110,000 payroll jobs were created, and the unemployment rate returned to 5.2 percent. Announced layoffs by companies through March are running 9.2 percent ahead of last year, notes Challenger, Gray & Christmas Inc., a Chicago outplacement firm. As might be expected, workers without jobs usually spend less.
• Real wages are being compressed by the desire of businesses to cut costs and, to some degree, competition from low pay abroad as globalization grows. Wages also are lagging behind inflation. This is unusual in a period when productivity has been growing rapidly - a 4.1 percent annual rate since 2001. Nonetheless, real wages fell 0.5 percent last year, and in the first three months of this year, the annualized nominal rate of wage growth was only 2.3 percent, a bit below inflation. "People are spending everything they are earning, and then more," says Kasriel.
• The Federal Reserve is pushing up interest rates in an attempt to avoid more inflation. That raises the cost of borrowed money and makes the purchase of a house more expensive.
Kasriel regards this latter factor as possibly the most threatening to the economy. Yet he still sees GDP growth running at a 3.25 percent annual rate for the rest of this year, somewhat below the consensus of 3.6 percent of some 50 economists surveyed monthly by Blue Chip Economic indicators. That's a slowdown, but not a recession.
Most Wall Street economists don't like to make forecasts too far from the consensus. The consensus is usually a safe place to be. If an economist makes a prediction way out of line with the consensus and he proves to be wrong, his reputation will suffer. He might even be fired.
Kasriel is one of the minority of economists these days who gives some weight to the nation's money supply in making forecasts. A hike in interest rates usually slows the growth in money - the cash and credit that people use to buy things and services - after about three months. In turn, that retards economic activity after perhaps six months or so.
Since the first half of 2004, the growth rate in the money supply has fallen from as high as 9 percent to 3.6 percent in the last 13 weeks - not much more than inflation, he says.
In addition, the leading indicators - statistics intended to point to the future path of the economy - are weak. Consumer confidence dipped in March, notes the Conference Board. The tax cut boost is past.
That's the gloomy side of the economy. But maybe it's just a spring phenomenon.
David Malpass, chief economist of Bear, Stearn & Co., a New York investment firm, tosses out as many good numbers as Kasriel can bad numbers.
Mr. Malpass notes that there was talk of a slowdown also in the springs of 2002, 2003, and 2004 - and now again this spring.
"The economic environment is nearly as good as in the past three springs, and the GDP growth result will be similar - steadier and faster than historical norms," he predicts. That is, growth in GDP will run between 3.3 and 4.5 percent this year.