Fifty years ago, British economist John Maynard Keynes complained that it was difficult to control economic activity in America because, unlike the English, Americans tended to think alike.
One slight change in monetary policy could have a landslide, rather than a gradual, effect because all Americans would react in the same way, Keynes said.
The same could be said today. It was such a consumer herd instinct that led to the wild spending spree early in 1984 as well as the unexpected sharp drop in activity during the last two quarters of the year. Consumers hold a major key to the economic outlook for 1985, and economists aren't quite sure what they are going to do.
"As the U.S. economic expansion has matured, consumer spending, particularly purchases of goods, has become more erratic," according to Citicorp Information Services. "For example, declines in real spending in July and August followed increases in spending in May and June and were followed by a sharp increase in spending in September and a decline in October."
"Consumers seemed very fickle this Christmas season," said the Townsend-Greenspan consulting firm, in a report to clients. "For a few days they would pack the stores, only to disappear once again. City stores seemed to have less traffic than normal, while some of the malls were packed."
So economists are concerned about what "the consumer" is planning to do this year. Consumer spending makes up more than 60 percent of gross national product, and consumer reactions are major determinants in inflation, interest rates and other aspects of economic activity.
If consumers don't buy, factories shut down. The decline in consumer spending was a major reason for the current economic "pause." Many indicators of future strong spending did not foretell the decision by consumers last summer and fall to halt purchases suddenly, leaving factory managers and retail planners befuddled.
Some economists suggested that during the spurt in buying that helped produce growth rates of 8 percent in the first half of 1984, consumers ran up their credit at near-record rates and decided to reduce their buying sharply. As Keynes would have predicted, they did this as a herd.
Other economists said tight monetary policy by the Federal Reserve several months earlier had kept interest rates unbearably high.
The factors likely to determine consumer behavior in 1985 are whether employment continues to rise, interest rates decline, incomes increase, confidence remains high and the Federal Reserve Board supplies enough credit for consumers to continue borrowing. However, there are other factors that may emerge, such as tax increases or cuts and uncertainty over plans to revamp the tax system.
"The psychological impact of the Treasury's tax proposals on the consumer are another wild card in the short-term outlook," wrote economist David D. Hale, chief economist for Kemper financial services. "There is not yet any polling data available on how consumers and businessmen are responding to the Treasury's recommendations, but there is some anecdotal evidence which suggests that it may be having an adverse impact on consumer confidence and spending, especially in the states with high marginal tax rates.
"As the credit-control-induced slump of March 1980 illustrates, the emotional response of consumers to government policy announcements can sometimes greatly exceed what the experts might rationally expect," Hale said.
"In 1980, millions of Americans mistakenly believed that they could no longer use their credit cards. Today, it is possible that millions of people are spending more cautiously because of concern that they will soon suffer large tax increases resulting from abolition of federal deductions for credit-card interest, state income taxes, sales taxes and property taxes," he said.
Many economists say they expect economic growth to rebound this year, after a sharp slump in the third and fourth quarters of 1984. One of the reasons for the optimism is the recent decline in interest rates, notably those for mortgages.
Mortgage interest rates have declined one to two percentage points since the summer and, barring any major disruption of housing construction because of winter weather, "the worst is probably behind us" as far as housing starts, said Roger E. Brinner, in his latest forecast for Data Resources Inc. "With the decline in interest rates since mid-November, the Federal Reserve has built a solid floor under residential construction," he said.
Brinner said conventional mortgage rates should drop from their peak last year of more than 14 percent to a range of 12 percent to 12.5 percent by the middle of this year.
Brinner also said that real growth in consumer spending from the fourth quarter of 1984 to the fourth quarter of 1985 should slow from about 4.3 percent in 1984 to 2.5 percent this year. Although spending for services should keep total consumption up this year, income growth will slow in the second half of 1985, consumer confidence will decline and interest rates will rise after mid-year, DRI said.
"Consumer spending seems to have picked up, even though the Christmas retail sales season proved to be disappointing to retailers on a year-over-year basis," said Allen Sinai, chief economist for Shearson Lehman/American Express. "A broad-based rise in consumption during November, both in durable and nondurable goods, and strong unit auto sales during December suggest that households are once again letting loose of the purse strings."
Consumers this year are expected to satisfy their pent-up demand for automobiles caused by the General Motors strike this fall, followed by a strike by Canadian auto workers that affected the supply of some automobile parts in this country.
Sinai pointed toward the 1.8 percent rise in retail sales during November, an increase in aggregate consumption spending of 0.9 percent in December and the 10.8 million unit sales pace for domestic auto makers in December. Despite the slight rise in the unemployment rate in December, the number of employed persons continued to rise, augering well for continued consumer spending, economists said.
"Income growth was strong in November, employment gains were sizable, consumer confidence held up and consumer financial positions remained adequate to support a stronger pace of spending in the months ahead," Sinai said. "Though the unemployment rate should rise a little over the next few months, sufficient growth in income is likely so as to maintain a continuing rise in consumer spending."
The moderate inflation picture forecast by many economists will also keep consumer spending down, some analysts said. In the 1970s, when Americans experienced double-digit inflation, they rushed to buy goods before they expected prices to rise. However, now that consumers' inflation expectations are lower, they are not in a hurry to buy goods, economists said.
Another drawback to a consumer surge is the propensity of Americans to buy cheap imported goods, so that while demand for products is high, the benefits are spilling over into the foreign sector.