Evans On The Economy -- Money To Burn

Dec. 21, 2004
High-end purchases continue to rise as consumers save less and spend more.

This has been a most unusual recession. With the upward revision in fourth quarter GDP, plus the strong likelihood of a substantial gain this quarter, it appears that real GDP declined in only one quarter, for a total net reduction of 0.3%. Yet at the same time, the declines in industrial production and employment were about the same as previous recessions, when real GDP fell an average of about 1.5%. It is, of course, always possible that the data are grossly in error, and this apparent discrepancy will disappear upon revision. However, it is more likely that this dichotomy occurred because capital spending and exports have been weaker than usual, but consumer spending has hardly slumped at all. Even more surprising are the gains at the high end in consumer spending. It used to be that one could tell when a recession had occurred by simply looking at a graph of the change in housing prices. During this recession, however, real housing prices have risen more than average -- in spite of the massive stock market slump. Other recent reports indicate that the prices of already ridiculously overpriced wine have doubled in recent months, demand for high-priced thoroughbred horses is strengthening, and high-priced yacht sales have never been stronger. All these price increases have occurred during a time when the decline in stock prices has been the greatest in more than 25 years, and high-end bonuses have been dramatically slashed or completely eliminated. There seems to have been a change in attitudes among the rich in the aftermath of Sept. 11: If the world is that shaky, maybe it is better to spend it now instead of saving it for a day when it will all disappear anyhow. Another possibility is simply that with the great stock market gains of the 1990s now confined to the history books, and the likelihood of another major stock market rally in the foreseeable future quite dim, high rollers have decided to spend their assets instead of watching them deteriorate further as one high-flying company after another reveals that those huge increases in profits were all figments of the accountants' imaginations. Whichever reason turns out to be more accurate, I expect to see a major shift in the composition of the economy over the next several years that will result in more consumer spending and less capital spending per dollar of GDP. During the 1990s the ratio of capital spending to GDP rose rapidly; that development was variously described as the "technological revolution" or the "new economy." However, the resulting thud was so resounding that an early revival of those spending plans seems most unlikely. Instead, people will save less and spend more. This shift refers mainly to those denizens of the upper income bracket. Consumer data have told us for some time that on average, those whose income is below the upper brackets do not save any of their income. Whenever I mention this in one of my speeches, someone in the audience who conscientiously saves a good proportion of his salary is offended and asks me what that is supposed to mean. What it means is that while some people still save part of their salaries on a regular basis, they are increasingly being overwhelmed by spendthrifts whose consumption regularly exceeds their income. How is that possible? It's actually quite simple: Every year many people refinance their homes and spend part of the increased equity. Also, many people who save through 401(k) and other retirement plans turn right around and withdraw that money, so that their net savings is zero. Over the next few years the personal saving rate -- which has already fallen from 9% to 0% over the past decade -- will turn negative. The sources of funds for investment provided by the Federal government surplus also will dry up. On balance, the Federal budget position over the next few years will be closer to deficit than surplus. As a result, investment will languish while consumer spending -- particularly at the high end -- will continue to rise at above-average rates. Michael K. Evans is chief economist for American Economics Group, Washington, D.C., and president of the Evans Group, an economics consulting firm in Boca Raton, Fla.

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