A recovery awaits consumer demand, but will it be there?

Posted: Thursday, May 31, 2001

NEW YORK (AP) -- Measurements of consumer sentiment recovered in May after having fallen sharply in April, but there's more to the story than that, and it could mean trouble for an economy assumed to be on a certain recovery course.

A sentence in the University of Michigan's report on its May survey tells the story in a nutshell: ''Most of the gain in the May survey was recorded among households with incomes of $50,000 or more.'' Upper income households benefited from a rebound in stocks. Lower income families worried about layoffs and higher energy prices.

There is little surprise in such findings; they merely duplicate what most people already have observed, which is the growing disparity between upper- and lower-income financial standards and expectations. The spread is skewing the results of many surveys and impressions about how well-off Americans are.

Anecdotally, the evidence is stark -- athletes, celebrities, investors and corporate executives making more in a day than most people earn in a year. Statistically, the evidence is perhaps even starker: Over the past two decades, earnings of the top 20 percent have risen sharply, while those at the bottom three-fifths haven't kept pace.

The significance of the growing gap has often been ignored because of the general feeling of prosperity, relatively low interest and home mortgage rates, low joblessness and easy credit. But household savings rates are currently below zero, which means consumers not only aren't saving but are borrowing heavily as well just to keep up their standards.

Also clouding the disparity is the so-called wealth effect. With home prices rising and with just under 70 percent of families owning a home today, the sense of having fallback funds is widespread. Adding to the feeling is the realization that home equity can easily be tapped through refinancing a mortgage or by means of home equity loans.

Nevertheless, the consumer surveys that now suggest rising confidence also show that much of that confidence lies not in the general population, but among the more well-to-do.

It is the latter, according to a paper by two Federal Reserve economists, who accounted for 80 percent of the wealth effect during the 1990s.

All this leads to worries among economists that consumers may reverse course and tighten the grip on their wallets, and that the effect will work its way back to weaker retail markets, lower production, less investing and a weak rather than robust stock market. In that situation, rich and poor alike would be affected.

It is why Alan Greenspan, the Federal Reserve chairman, has so often commented that recovery hopes depend on consumer attitudes toward the future. And why the Fed so closely watches monthly consumer confidence reports and agreed with the Bush administration that a tax cut was permissible

But, considering their financial fears and absence of savings, consumers might be reluctant to respond to lowered interest rates, tax cuts and the urgings of lenders and producers to buy cars and appliances on ''easy credit terms.'' Easy credit, it seems likely now, is understood to have serious consequences.

To put it another way, consumers might take a show-me attitude and wait for proof that the recovery is out there. But the recovery, if it is out there as so many believe, may be waiting for proof that the consumer is ready to buy.

End Adv PMs Tuesday, May 29.

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