- The Washington Times - Saturday, December 22, 2001

Americans cut spending in November and incomes shrank for a third straight month, reflecting the toll from job losses and consumer burnout after a record new-car buying binge in the fall.
The spending decline of 0.7 percent reported yesterday by the Commerce Department showed the critical Christmas-shopping season getting off to a slow start. Analysts expect one of the poorest seasons in years based on sales so far.
The Bank of Tokyo-Mitsubishi, which closely tracks sales at major chains, expects a rise of 1.5 percent over last year, in what would be the worst performance since 1986.
Discount stores like Best Buy, Wal-Mart and Costco Wholesale are seeing increased sales, but mainline department stores like Hecht's, Lord & Taylor, and Sears, Roebuck & Co. are reporting sizable drops.
The downshift in spending is occurring despite rising optimism about buying conditions caused by falling prices and interest rates, as well as gains in the stock market and initial victory in the war in Afghanistan. The more upbeat consumer sentiment was seen in a fourth monthly rise in an index published yesterday by the University of Michigan.
While consumers still may feel like spending, analysts say the problem is they cannot keep increasing purchases unless incomes start to grow again. Incomes have been stagnant since August, forcing consumers to go deeply into debt to finance their fall spending sprees.
"The trend of income is now declining," said David Orr, chief economist with Wachovia Securities. "Eventually, less income will bring spending to a halt."
Mr. Orr said spending held up better than expected this fall because of the boost consumers got from falling energy prices, tax rebates and a big wave of mortgage refinancings that put more money in their pockets. A typical refinancing lowers monthly mortgage payments by about $200.
Although energy prices have remained low, the stimulus from tax cuts and refinancings is petering out and will not repeat next year.
Congress adjourned for the year yesterday after failing to pass a $100 billion package of tax cuts and spending aid for the unemployed that many economists had expected to provide support to consumers next year.
Rates on 30-year mortgages jumped to a high of 7 percent this month after hitting lows around 6.37 percent in mid-November, cutting applications for refinancing by half.
Many consumers are consolidating debts and spending less out of a desire to work down their record debt loads and build up a financial cushion in case they lose their jobs.
November's spending report showed that goal is increasingly elusive, however, because incomes are declining along with spending. That left the savings rate at a meager 0.9 percent of income even with the spending cutback. Savings had fallen to a record low of 0.2 percent in October.
"Consumers seem disinclined to add debt right now, so spending is limited by income growth," said Nariman Behravesh, chief economist with DRI-WEFA forecasting group.
Mr. Behravesh expects incomes to remain flat for several more months, with the loss of income through layoffs offsetting pay raises enjoyed by workers still on the job.
"With year-end bonuses down and many companies considering salary freezes, wage cuts and higher employee contributions to health insurance, consumers are bound to be more cautious in their spending" next year, he said.
One important source of support for consumers is the rise in the value of their homes in the past two years. However, many consumers who stretched resources to purchase homes, especially those working overtime and holding down second jobs to qualify for mortgages, are having difficulty making ends meet and are severely curbing discretionary purchases, Mr. Behravesh said.
Some economists found reason for optimism in yesterday's news.
"Spending held up extraordinarily well and with confidence rising, households just may be able to keep it up," said Joel Naroff of Naroff Economic Advisers.
"Yes, it is true, consumption fell sharply. But let's keep in mind that the decline came after an enormous 2.3 percent surge in October," he said. "If household spending were simply flat in December, consumption would be up by about 4.7 percent in the fourth quarter."
The financial markets took the upbeat view, focusing on the return of consumer sentiment to levels last seen in August.
"Consumer confidence has bounced back to where it was before September 11," said David Hoffman, a bond-fund manager at Brandywine Asset Management Inc. "That's positive for the economy."

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