Can or will consumers keep spending?

Posted: Wednesday, July 02, 2003

NEW YORK (AP) Shoppers, your economy needs you. Stop spending now and you could really spoil chances of a recovery.

With businesses still holding out on making major purchases, it's looking more and more like consumer buying will be key to reviving the slumbering economy.

But are consumers up to the task? With debts mounting and little left on their wish-lists, there are fears they'll pull back just when they're needed most.

That would be bucking the trend of previous economic slumps, but then again, consumers haven't been so predictable in this downturn, anyway.

They used to curb their spending when things were really tough and then returned to buying once they felt the worst was over

This time, they never stopped spending through three years of economic and stock market turbulence. And with consumer spending accounting for two-thirds of U.S. economic activity, all their buying helped stem the economy's slide.

With mortgage rates so low, they have been eager to buy new homes, and interest-free financing has prompted many to buy new cars. This downturn was the first since 1949 without at least one quarter where spending fell, according to

But what's next?

That's especially crucial since the business sector gives no indication of being ready to pick up the slack. A report last week showed capital spending fell at an annual rate of 4.4 percent in the first quarter. Clearly, the lowest interest rates in more than four decades haven't yet given companies enough incentive to recharge their buying.

''Business spending is the Achilles' heel of the economy,'' said Sung Won Sohn, chief economist at Wells Fargo & Co. in Minneapolis. ''The economic baton needs to pass from consumers to businesses.''

Until it does, a lot is riding on consumers' wallets. While hopes are for new tax cuts to be a boon to spending, economists still worry what else will be able to spur buying.

''Their spending doesn't have to come back because it never stopped,'' said Scott Hoyt, director of consumer economics at ''The question is whether they have the desire or the wherewithal to keep it going.''

Some concern centers on the lack of pent-up demand. Since consumers have been buying houses, cars and just about everything else they've wanted in recent years, there isn't much left that they need.

On top of that, there is the issue of debt burden. Low interest rates have let consumers borrow money cheaply, and they have used those funds to fuel most of their spending. If interest rates start to rise, many Americans could find themselves pinched.

A recent report by investment firm Merrill Lynch shows household debt soaring at a 10 percent annual rate during the first quarter, on top of a 10.9 percent rise in the fourth quarter of last year. It was the fastest pace of debt accumulation over two quarters since 1986.

Over the last year, the report said, indebtedness has grown 9.5 percent. That's twice as fast as gains in personal income, although the majority of the debt is tied to home ownership, with residential mortgages accounting for a record 72 percent.

''Aren't recessions normally periods where the excesses of the previous boom are purged? Not this time around,'' wrote David Rosenberg, chief North American economist at Merrill Lynch.

Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)

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