- The Washington Times - Tuesday, December 4, 2001

Consumers ignored a second month of declining incomes and increased their spending by a record 2.9 percent in October.
The spending splurge on cars, travel, and other goods and services reported by the Commerce Department yesterday more than recoups steep drops seen after the September 11 terrorist attacks and is helping to lift the economy this fall, analysts said.
But the loss of income resulting from the end of tax rebates, reduced working hours and the loss of more than 400,000 jobs during October means that consumers will have to limit spending in the future, analysts said.
Private wages and salaries dropped by $17.2 billion the most in eight years after not growing in August and September. When combined with the waning of tax rebates, disposable incomes fell by 1.7 percent after dropping 1.2 percent in September. The mix of dwindling incomes and surging spending sent the savings rate to a record low 0.2 percent.
"The October spending binge was awesome" and reflects not only the interest-free financing available at auto dealerships but also a welcome return to air travel and other leisurely activities as consumers shook off some of their fears after the attacks, said Joel Naroff of Naroff Economic Advisers.
But the snap back from September is unlikely to be repeated, and the lack of income growth "creates concerns about future trips to the malls and dealerships," he said. "Ultimately, it is income that drives spending and consumption that powers the economy."
Ed Yardeni, chief investment strategist with Deutsche Banc Alex. Brown, said: "There is still a significant risk of a consumer recession" as the cuts in jobs and incomes take their toll on consumer spending, previously one of the strong points of the economy while manufacturing and technology were languishing through much of the past year.
But he says he remains optimistic that unemployment will stay relatively low between 6 percent and 7 percent compared with previous recessions, because businesses are showing that they are reluctant to lay off workers even in the face of seriously declining profits, sales and prices.
Most companies appear to be imposing hiring freezes and slashing capital spending to cut costs, rather than firing workers apparently because so many businesses had difficulty recruiting talent as recently as a year ago, he said.
"Companies took it on the chin in profitability rather than cut labor costs aggressively," he said.
The widespread hiring freezes are major problems for consumers and have dampened confidence. The more than 7.7 million persons who are out of work are having difficulty finding jobs. That was evidenced by the fall last month to the lowest level in 37 years of a measure of help-wanted advertising published by the Conference Board.
And while another rash of layoffs may be coming at the end of the year as a result of the worst profit recession in a decade, Mr. Yardeni said there are preliminary signs that the plunge in profits has reached a bottom.
Even long-suffering manufacturers and technology companies are seeing small pickups in business. A report from the National Association of Purchasing Management yesterday showed a jump in new orders at factories this month.
Any budding recovery in business and manufacturing would "reduce some of the pressure on companies to cut their labor costs," Mr. Yardeni said.
David A. Levy, economist with the Jerome Levy Forecasting Center, said October's spending surge mostly reflected a bonanza at auto dealers as consumers took advantage of cost-free financing and deployed their $300 to $600 tax rebates as down payments on new-car loans.
But the car sales will disappear once the incentives are removed, he said, and leave heavily leveraged consumers more burdened with debt.
"Consumers are at the limits of their ability to support the struggling economy, and about to help a lot less," he said. "They are receiving pink slips, facing unexpected income disappointments, doing a miserable job servicing their record debt burdens, losing money on stocks and saving less of their income than in any post-Depression year except 2000."

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