The Customer Holds the Key

By spending enthusiastically for everything from cars to clothespins, the American consumer lifted the economy out of a ditch in 1975 and has kept it chugging along ever since. The U.S. shopper still seems insatiable, but now the experts are becoming worried about him (and, of course, her). Says a top Washington economist: "The golden question mark for the economy is, what is buried in the consumer's mind?" Echoes Daniel Brill, the Treasury's chief economist: "I'm very concerned right now about what is going through the consumer's head, as well as what is coming out of his pocket."

The economists are turning to Pop psychology because the consumer seems as skittish as a race horse. Several surveys show a marked drop in consumer confidence in recent months. The respected University of Michigan national survey reveals growing uncertainty about the economy's future, bewilderment over the root causes of inflation, and defeatism about the Government's chances of containing it. The Michigan group concluded that the consumers' outlook was "on balance unfavorable." Nonetheless, consumers told the pollsters that they felt it was a good time to buy cars, houses and other big-dollar items. Never before in the 32-year history of the Michigan surveys have consumers been so pessimistic about business yet so willing to spend.

Automotive sales are particularly strong, and this year Americans are expected to buy a record 15 million or more cars and trucks. Housing starts have run at an annual rate of 2 million or more in April, May and June. Some retail sales have softened in the last couple of months, but the large chains are reporting strong gains so far this year: Sears, Roebuck is up 13%, Montgomery Ward 14% and K-Mart 23%.

This surge is most unusual because the consumer historically responds to inflation by battening down his spending and increasing his saving, waiting for the proverbial rainy day that invariably follows a period of rising prices. But the consumer seems to be becoming more like a Latin American, who spends out of fear that he had better buy it now or it will only cost more tomorrow. Says Marvin Brenner, owner of the Casual Village women's clothing chain in New Orleans: "People know that there will be another minimum wage hike in January, and it will cause wages to go up all along the line. The minimum wage very quickly affects clothing prices, so people are buying in large part as a hedge against inflation."

The higher the price, and the better the quality, the more they are buying. Furs and jewels are selling as if buyers thought minks were becoming an endangered species and South Africa's mines were giving out. Reports John Eyler, merchandising manager for Oregon's Meier and Frank department stores: "We've never sold so much fine china or silver. It's selling like crazy." Adds Lasker Meyer, senior vice president of the Houston-based Foley's chain: "Our big-ticket items have been very strong."

Perhaps this trend shows a growing conviction among Americans that costly goods retain real value, while mere money depreciates. More likely it indicates that Americans are also emulating the wise and worldly Europeans, buying fewer goods, but goods that have more class and durability. Jay Plotkin, vice president of Craig's ready-to-wear chain in Houston, argues: "People are looking for more permanence in their selections, not just faddish clothes. Retailers call this 'investment dressing.' "

The experts are split down the middle over whether the spending spree will continue--or falter in early 1979 and lead the economy into recession. Detroit's automakers, most of whom had underestimated the strength of this year's sales, almost unanimously expect a repeat of 1978's performance next year. Real estate brokers, pointing to high demand from the now grown "baby boom" generation, predict a banner year in 1979. Yet many economists agree with Vice President Ted Tung of Continental Illinois Bank, who warns, "There will be a substantial slowing of consumer spending in the next six months or so."

Economists worry about the aftereffects of hedge buying. People may be spending too much of their income now, and their straitened budgets may force them to buy less later on. Consumers have been plunging dangerously into debt; installment credit swelled at record rates in two of the past four months. "The consumer is going to choke on that debt at some point," warns one Government economist. "I don't know where it's going to happen, but there is increasing concern that the debt burden will become too heavy." Mortgage and auto loan rates have climbed to double digits, and at some point those daunting interest charges may turn off even the most acquisitive consumers.

Lyle Gramley, a member of President Carter's Council of Economic Advisers, says: "I still think we'll see a strong third quarter, but inflation is the key to future consumer action. If inflation shows signs of tapering, as we are expecting, then consumer purchases should stay up." Adds a prominent Government economist: "We won't really know what is happening until Christmas. My real fear is that the consumer just can't handle 7% to 8% inflation." qed

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