November 20, 2000

The Outlook

NEW YORK

As the year-end holiday shopping season approaches, retailers are worried that consumers are so heavily indebted, undersaved and overspent that they are in no position to shop as lavishly as they did last year.

A quick look at some highly publicized economic indicators seems to support that view. The savings rate moved into negative territory earlier this year as consumers spent more money than they earned. Economic activity, meanwhile, is slowing from rapid growth to moderate growth. That may explain why chain stores and mass merchandisers are crying the blues about less yuletide cheer at the malls. The International Mass Retail Association forecasts a rate of U.S. sales growth as low as 2% during November and December, compared with 5% growth last year.

But many economists are optimistic, and they expect spending to remain healthy throughout the holiday season. "Consumer spending will continue to surprise many by its resilience," predicts Diane Swonk, chief economist at Bank One Corp. in Chicago.

What does Ms. Swonk see that retailers don't? In a phrase, the New Economy. The rising affluence of an aging population may have changed the way consumers spend. So the old ways of measuring consumer outlays may not be doing a good job of capturing the reality. The New Economy has also significantly altered sources of income, so the old gauges of wealth don't adequately measure the health of the consumer.

These new views show a consumer plenty able to stuff fireside stockings this December, although not necessarily in the traditional ways or with goods purchased from traditional Christmas retailers. The Federal Reserve last week said "the easing of demand" hasn't been enough to warrant a lower federal funds rate.

Of course, the spending outlook could change if stock prices suddenly deteriorate and consumer confidence plummets or if companies begin firing large numbers of workers due to dwindling profits. But as long as the jobless rate remains at or near 30-year lows and worker pay scales continue to rise, many economists believe it is a mistake to assume that spending will dry up.

Ironically, while the consumer may be healthy, many big retailers seem a bit queasy. But the reason for the disjunction may have little to do with consumers' spending ability. The large baby-boom population is aging, yet retailers have done a poor job of stocking merchandise that appeals to the bulging demographic group that is growing past age 50.

Retailers also are trying to solve the puzzle presented by the trend toward casual office wear. Many workers now buy fewer and less-expensive items of clothing: a $20 pair of khakis and a $30 shirt can replace a $200 suit these days.

Sales at stores open at least a year in October 2000 rose just 2.9%, year-on-year, compared with a 4.9% rise in October 1999, according to a Goldman Sachs survey of major retailers. But the Commerce Department's October report on retail sales, a far broader measure, showed a 7% rise from a year earlier. It was a slowdown from last year's torrid pace in excess of 9%, but it was still more than a full percentage point higher than the 10-year average.

"We've reached a level of affluence in today's economy when people are spending more on services and recreation than on goods," said Ms. Swonk. She forecasts spending on traditional holiday goods will rise 6.2% this year, its slowest pace in four years. But she now monitors and forecasts a spending figure the government calculates called "personal-care services and recreation." She predicts this category, which includes spas, gambling and entertainment, will rise 10.5% this year.

While measures of spending have changed, so have measures of income. No statistic supports the view that the consumer is tapped out better than the steadily declining personal-savings rate.

On closer inspection, however, the low savings-rate number mightn't be telling a story of economic decadence at all. It may well be the result of the orthodox accounting method the Commerce Department uses to calculate it. Essentially, the government deducts total U.S. spending from total U.S. income and what is left is considered savings. But that method doesn't capture income from capital gains, dividends and many other sources. And money that is actually accumulating in retirement plans and private investment portfolios isn't counted as savings.

Recently, economists Richard Peach and Charles Steindel of the New York Federal Reserve included capital-gains income in calculating the savings rate. They found that the savings rate was really 10% in 1999, 1.4 percentage points higher than the same figure in 1995 and almost eight percentage points higher than the Commerce Department's rate in 1999.

Those most worried about consumer spending point to relatively high debt-service payments, which have risen to 13.7% of disposable income from 13.3% in 1990. But High Frequency Economics, a Valhalla, N.Y., research firm, added back the substantial dividend payments gleaned from mutual funds and stocks and finds consumers' debt burden far below their 1991 peak. "Consumers' debts will not be the trigger for a reversal of the strong growth of spending," said Ian Shepherdson, High Frequency Economics' chief economist.

-- Steve Liesman

Write to Steve Liesman at steve.liesman@wsj.com