There is a saying among economists: "As the consumer goes, so goes the economy." However, lately it is difficult to tell where consumers are headed and whether the economy will follow.
Recent indicators of consumer confidence and spending have been mixed, leading some economists to surmise that consumer spending will rebound strongly and economic activity will pick up from its first-quarter slump.
Others say that confidence has been shaken and many consumers are too worried about paying their bills to make further expenditures. Consumer spending should decline from a 5 percent rate during the first two years of the recovery to about a 2 to 3 percent rate of increase this year, economists said.
Consumer spending is the backbone of the economy, accounting for about two-thirds of the nation's gross national product, or output in goods and services. However, recently consumer spending has shot up, while the growth in GNP has slowed dramatically.
Part of the discrepancy was an unusual drop in government spending and a slowdown in business purchases. However, a large reason for the economy's slowdown in recent months has been the pickup in purchases of imports.
Consumers have been borrowing at a record pace, but sales at retail stores have declined. Automobiles sales have slowed and then picked up. Purchases of furniture and other durables have been erratic.
Sales at retail stores dropped 1.9 percent in March, the largest decline since June 1982.
"Although one month of data gives little insight into the trends of consumer spending, this large a decline has to dampen optimism about the strength of the consumer sector," Data Resources Inc. said in a recent newsletter. "Despite the extreme volatility of the retail sales figures, their large revisions and other factors , the overall trend cannot be denied: In real terms, retail sales have shown almost no growth since last summer."
Economists rely on indirect indicators such as the trend in incomes, employment and interest rates for determining what consumers will do. However, in recent months incomes have risen, employment has been higher and interest rates have declined, suggesting strong consumer spending, but purchases have been off.
Economists watch the pace of purchases of durable goods -- generally those that last more than three years -- because they tend to be more volatile and have a stronger effect on changes in economic activity than goods that people regularly buy. Durables are the goods people tend to put off buying when interest rates are too high, they are worried about future income or concerned about whether they will keep their jobs.
"During the first 12 months of the current recovery, spending on furniture, other durables, food, clothing and fuel posted gains exceeding those in any past recovery," DRI said in a recent report. "Spending growth in all categories has slowed in the subsequent 14 months. Growth in durable-goods spending is no longer running ahead of past expansions, and growth in nondurable-goods spending is at the lower end of the historical range. While the slowdown is bad news for retailers, it is a disaster for consumer-goods producers since imports are capturing an ever larger share of any increase."
Consumer demand is beginning to cool off," said David Jones of Aubrey G. Lanston. "Since last summer there's been a tendency for a weakening to take place in manufacturing," largely because of the inroads made by imports.
"Manufacturing employment has weakened significantly and has declined" during the last six months, Jones said. "That is the starting point for an eventual sharp pullback in consumer demand. Once you start to weaken that key sector, others follow. People begin to read about it and begin to worry about it."
If the weakness in manufacturing spills over into other industries, "That's going to moderate income growth," Jones said. "The second half of the year, there's going to be a sharp slowdown in consumer spending."
Consumer expenditures unadjusted for inflation rose 0.7 percent in January and 0.9 percent in February, and declined 0.5 percent in March. At the same time, disposable income increased 0.6 percent in January, and declined 0.8 percent in February and 0.5 percent in March.
Since consumers have been spending at a faster rate than they are receiving income, they have been borrowing to finance expenditures and dipping into their savings, economists said. The personal saving rate -- savings as a share of total disposable income -- declined from 6.3 percent last October to 4.6 percent in February. Borrowing reached a record high in February.
A lot has to do with consumer psychology. In recent months, consumer spending has been affected by bad economic news, the collapse of a savings and loan in Ohio, the increase in Japanese automobile quotas, the delay in federal income tax refunds, and a new belief that, rather than rising, prices will fall in the future.
"There's disinflation psychology now," Jones said. "They're waiting for bargains."
Automobile sales had been sluggish until recently, and economists said consumers are looking for new models, waiting for the influx of more Japanese autos and holding back until car prices drop.
The bank holiday in Ohio, called after a major savings and loan there failed, produced nationwide television shots of "poor blue-collar workers asking for deposits. . . with panicky looks," Jones said. "The publicity given to it was widespread." That tended to shake peoples' confidence even if they lived outside of Ohio.
Consumers are "beginning to react to bad news reports" about the economy, said Nariman Behravesh, chief U.S. economist at Wharton Econometrics.
Wharton is bullish on consumers and believes that spending will remain strong this year. Despite the stagnant unemployment rate, employment has been rising, especially in services, income still is growing -- although at a slower rate than at the beginning of the expansion -- and interest rates have declined.
Recent problems in spending last month have been attributed to delays by the Internal Revenue Service in mailing out income tax refund checks. "That has played into weak sales in March," Behravesh said. "Once the checks are mailed, we expect to see a rebound."
Borrowing by consumers has been high, and the ratio of installment debt to take-home pay is near record levels and by some calculations is about two percentage points above the record of 17.8 percent reached in 1979, according to Commerce Department Chief Economist Robert Ortner. Before 1980, the debt-to-income ratio was calculated differently.
Instead of spending more of their income, some consumers are using those funds to pay off debt, Ortner said. In addition, consumers may hold off some spending out of fear that they won't be able to pay future debts, economists said.
Consumer confidence is near historic highs, but is lower than it was a year ago, Ortner said. Confidence tends to be correlated with statistics such as inflation, unemployment, interest rates, and the stock and bond markets. "When inflation rises, people start to worry," Ortner said.
Sometimes people feel wealthier because of gains in the stock or bond markets, even if they don't own stocks or bonds. "People feel like they have more," Behravesh said.
Economists now are trying to determine whether consumers feel they have spent enough. If employment trends are good, spending should continue, they said. If the Federal Reserve Board adopts a looser money policy and interest rates decline, perhaps people will buy more homes and more furniture, washing machines and appliances to go in them.
However, if the dollar's value remains high, making the price of imports relatively cheaper than competing domestic goods, consumers' dollars may continue to go toward imports, possibly resulting in slower growth at home, a loss of manufacturing jobs, reduced confidence and subsequent lower spending.