The Recovery: Starting to Fade

By John Greenwald

For all those who believed that the U.S. economy had finally climbed out of the doldrums, the news from the nation's shopping malls last week came as a slap in the face. The Commerce Department reported that Americans shut their wallets in March and sent retail sales down 1% for the steepest monthly decline in more than two years. While part of that drop reflected the severe March weather, Commerce revised its earlier optimistic figures for February, saying store sales had fallen 0.3% instead of rising 0.3%, as it had originally reported. "The momentum of the recovery is decidedly fading," says Allen Sinai, chief economist of the Boston Co. Economic Advisors. "The surge late last year was not, and is not, sustainable."

% Economists did not need to look far for the meaning: the decline in consumer spending, which accounts for two-thirds of U.S. economic activity, was a clear sign that the euphoria that greeted Bill Clinton's election has ended. Propelled by optimism about the new President, consumer confidence soared in the final three months of 1992 and the economy expanded a healthy 4.7%. But Treasury officials now privately concede that the pace of growth could dip below 2% in the first quarter of this year and bump along at no more than 3% for all of 1993. That would do little to lower the unemployment rate, which has been stuck for the past two months at 7%.

After a brief and hopeful interlude, Americans seem to have contracted a fresh case of the jitters. "I was walking through the mall the other day, and I thought, Hey, I can buy all these things again," says Stuart Schwartz, a Los Angeles department-store clerk who recently spent two months on the unemployment rolls. "But then I thought, No, I'd rather hang on to the money."

Like Schwartz, millions of Americans may be ready to switch from impulse buying to panic saving, driven in part by fear of layoffs. That turnabout would be rich in irony. After years of being exhorted to save money and reduce debt, consumers who finally do that are likely to find their newfound thrift hobbling the recovery.

In another irony, the growing mood of caution comes at a time when many households have fresh cash on hand. Americans pocketed $12 billion last year just by renegotiating their mortgages. "The nation has some money to burn for a change," says Gail Fosler, chief economist for the Conference Board, a business research group. "But no one wants to light the first match. It's not a recovery. It's only an improvement."

While candidate Clinton promised to "focus like a laser on the economy," much of the current reluctance to spend stems from confusion about President Clinton's economic policies. "Clinton has had so many mixed messages that people don't know what to think," Fosler says. Concurs William Hoglund, executive vice president of General Motors: "The so-called recovery is the slowest that man has ever seen, and it hasn't resulted in any more employment. The President's program merely adds another note of uncertainty. So the consumer doesn't feel that anything is happening at all."

Americans have also been paying for policies that George Bush enacted last year. To spur the economy before the election, Bush lowered income-tax withholding rates for 1992 and thereby gave workers more take-home pay. But that triggered unpleasant surprises in the past few weeks when consumers found that they either owed more taxes than usual or could expect smaller refund checks to make up for the reduced amounts withheld in 1992. Overall, the Bush program is costing taxpayers an estimated $6 billion this year.

Many economists are no less skeptical of Clinton's stimulus proposals. Critics call the increased spending a pointless distraction from Administration plans to cut the federal deficit; the prospect of a smaller deficit has already sharply lowered interest rates. "The drop in rates is the most important thing that has happened to the economy since the election," says Van Doorn Ooms, a former chief economist for the House Budget Committee. "It's something that is worth four or five stimulus packages." Georgia State University economist Donald Ratajczak agrees: "The stimulus package is a bad idea at this stage in the business cycle."

For now, consumers seem content to sit on their wallets and leave companies wondering when they will return. "It's very nerve-racking, I can tell you that," says Alex Trotman, president of Ford's automotive operations. "It's like we just can't seem to get off the runway before we start falling back."

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CREDIT: [TMFONT 1 d #666666 d {Source: The Conference Board}]CAPTION: CONSUMER CONFIDENCE

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CREDIT: [TMFONT 1 d #666666 d {Source: Dept. of Commerce}]CAPTION: CONSUMER SPENDING

With reporting by Dan Cray/Los Angeles, William McWhirter/Detroit and Adam Zagorin/Washington