Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, January 5, 1992 TAG: 9201020197
SECTION: BUSINESS PAGE: E-1 EDITION: METRO
SOURCE: By JONATHAN MARSHALL
DATELINE: LENGTH: Long
BUSINESSES' JITTERS CAUSED THIS RECESSION
DON'T blame stingy consumers for all of the country's economic woes. Contrary to a lot of pundits, they are more victims than causes of the recession.With consumption accounting for about two-thirds of the economy, it is natural to view stay-at-home consumers as the nemesis of beleaguered manufacturers and retailers.
But nervous businesses, even more than nervous consumers, sent the economy into its tailspin and have slowed its recovery since. Their hair-trigger reactions to hints of trouble, such as slashing production and trimming payrolls, have deprived consumers of income to spend. Lack of money, not lack of will, has kept people home for the past year and a half.
You would not know that from all the attention paid by business economists to fickle public attitudes, as reported every month in surveys of consumer confidence taken by the University of Michigan and the Conference Board, a New York-based business research organization. They measure current concerns, such as how hard it is to find a job, as well as expectations for the economy's future.
Some business economists have argued that the steep dive in confidence that followed Iraq's invasion of Kuwait in August 1990 set off the recession, as jittery consumers held back on purchases of houses, cars and other big-ticket items. The same analysts warn that another steep dive recorded this fall could be equally bad news for the weakened economy.
Edward Yardeni, chief economist for the New York investment advisory firm C.J. Lawrence, last month cited plunging consumer confidence as reason to believe that the economy may be "falling apart." Richard Rippe at Prudential Securities warned that consumer gloom could cause the "entire process" of recovery to "halt or reverse." Even Federal Reserve Board Chairman Alan Greenspan said he has been shaken by consumer surveys.
But other experts say money, more than psychology, is what drives spending. "It's not consumer confidence that brought us into this recession, and consumer confidence won't bring us out," said David Cross, an economist with the Futures Group in Washington.
Instead, he said, "there are a lot of people out of work and they aren't buying because they don't have money to spend." As evidence, he points to the fact that individuals, far from sitting on hoards of cash, continue to save next to nothing.
Giulio Martini, an economist with the New York investment firm Sanford Bernstein & Co., recently ran a statistical analysis and confirmed that personal income levels tell the real story - not whether people are gloomy or optimistic. Weak consumption, he concluded, "is a reflection, not a cause, of the sluggish growth in GNP."
A look at the economy's steep decline in the last three months of 1990 suggests that business panic was more to blame than edgy consumers. Gross domestic product tumbled $48 billion that quarter. Personal consumption fell $29 billion, but business cutbacks of inventories and other investments cost the economy $56 billion, nearly twice as much. Other factors, such as improved exports, offset some of these losses.
One reason that businesses retreated may be that they took consumer polls too literally.
"If you look at confidence indexes through the Gulf War, they drew a lot of publicity because they fell so sharply, but consumers weren't really that reluctant to spend," said Michael Englund, chief economist at MMS International in Belmont. "Instead, we saw business decisions contracting the economy. They shed inventories and workers, fearing a fall in demand. It may be that people who read the results of the surveys are more responsible than the people who answer the questions."
The result was a self-fulfilling prophesy, as production cuts curbed employment and thus demand. The auto industry, for example, ran for cover at the first sign of trouble. Inventories dropped from 80 days' supply in October 1989 to 73 days in October 1990 to 65 days in October 1991. The result was devastating; auto production cuts alone accounted for two-thirds of the loss of GNP during the recession, according to Michael Niemira of Mitsubishi Bank in New York.
Industry's swift reaction was aided by modern inventory controls that help cut stocks to the bone, according to McKesson Corp. spokesman Marvin Krasnansky. His company does half of its ordering automatically by computer. "We used to have 150 people doing the buying," he said. "Now we have 15 people, for a $7.5 billion enterprise."
Another factor behind business cutbacks, on top of the recession, is the so-called down-sizing of large corporations. General Motors' announcement in December of plans to ax 74,000 jobs over the next few years is the most dramatic example.
At Xerox, which will cut 2,500 jobs by next summer, layoffs of middle managers are "part of an ongoing process to make us a more efficient organization that can be customer responsive," said spokesman Tom Abbott. The recession just speeded things up. "Obviously the uncertainty in present weak economic environment has accelerated our plans to ensure that our costs are contained."
As well-paying jobs disappear, consumer dollars are vanishing, too. Last month, real disposable income - after taxes and inflation - fell 0.5 percent. That, even more than plunging consumer sentiment, bodes ill for the economy. Even if consumers were in a happy mood, they can only spend so much money they do not have.
The one hope is that falling interest rates will spur business out of its lethargy. Consumers have done their bit for the economy, lifting consumption 0.4 percent in November despite falling incomes and widespread pessimism.