JEFFREY BROWN: Is the credit crunch translating into a consumer crunch? Will Americans shop amid the subprime mortgage crisis, rising oil prices, a volatile stock market, and signs galore of an economic slowdown?
As the holiday shopping season begins, these are some of the questions worrying retailers, manufacturers, the Federal Reserve, and economy watchers like our two guests. Tonight, David Wyss, chief economist for Standard & Poor’s, and Michael Mandel, chief economist of BusinessWeek magazine.
Well, David, starting with you, what are we seeing right now? Are Americans still spending?
DAVID WYSS, Standard and Poor’s: Well, Americans are still spending. I think we’re seeing some early signs that they’re starting to slow down, though. They’re getting squeezed by falling home prices, rising gasoline prices, and that’s going to leave less to spend at the shopping mall than they were able to spend a year ago.
JEFFREY BROWN: And what do you see — staying with you — what do you see in terms of retailers responding, as we begin the holiday season?
DAVID WYSS: I think we’re seeing a lot more discounting than we did a year ago, and I think we’ll continue to see that. Also, when you get these kinds of periods, it tends to create a late Christmas, because people know that retailers will get more desperate as Christmas approaches, and the discounts will get better.
JEFFREY BROWN: Michael Mandel, what do you see right now?
MICHAEL MANDEL, BusinessWeek: I think that retailers may be surprised this weekend that they may not get as much shoppers out there buying as they expected. And I agree with David, that the retailers are going to end up panicking after this weekend.
JEFFREY BROWN: They’re going to end up panicking. I mean, where are we going to see it, in what particular sectors or businesses, or what kind of retail?
MICHAEL MANDEL: I think you’re going to see it across the board. You know, one interesting question about it is whether or not things like consumer electronics are going to stay as strong as they’ve been in the past. Are people going to be out there buying those big-screen TVs? That’s going to be a big question.
JEFFREY BROWN: Now, Michael, I ticked off in our introduction some of the economic worries out there. What most translates into an impact on consumer spending?
MICHAEL MANDEL: Well, I think in the short time consumer spending is most impacted by things like jobs and prices. And David mentioned the high gasoline prices, which is taking away buying power from the consumers.
Going forward, if we're looking into sort of the end of this year and next year, what might be taking it away is difficulty getting credit, which is something that Americans have never seen -- they haven't seen in the last 20 years. Companies have always been willing to send out credit cards and give people basically as much credit as they wanted.
But if we start seeing a credit squeeze, I think we're going to see Americans cut back on spending quite a bit.
JEFFREY BROWN: Well, before we go that far ahead, David Wyss, tell us more about the importance of the consumer right now. We're always talking about the consumer propping up the economy. Is that still the case right now?
DAVID WYSS: Well, the consumer in the U.S. dominates the economy. Consumer spending accounts for 70 percent of GDP, so what happens with the consumer really affects almost completely what happens with the overall economy. We can withstand a drop in housing. That's only 6 percent of GDP. But 70 percent, any significant decline, and you're looking at something that looks an awful lot like a recession.
MICHAEL MANDEL: Can I jump in here for just one second?
JEFFREY BROWN: Sure, go ahead.
MICHAEL MANDEL: Which is that -- I mean, David is right in one sense, that consumers are 70 percent of the economy, but what's true now that wasn't true in the past is that a lot of what consumers buy is made overseas, so that, even if Americans cut back, it doesn't necessarily translate into jobs here in factories, because the factories are now in other places. What that means is that we're better suited than we were in the past to absorb a consumer slowdown.
JEFFREY BROWN: David Wyss, come on back.
DAVID WYSS: There's some truth to that. The fact is that over 60 percent of what we buy are services, not goods. So even though we import -- he's right, Mike's right, a majority of the stuff we import comes from overseas. A majority of what we buy are services, and those services, pretty much by definition, are produced here.
Weak U.S. dollar
JEFFREY BROWN: David Wyss, before we go onto the longer term consumer crunch question, the drop in the dollar, how is that -- what kind of play or impact does that have on the kind of economic worries we're talking about?
DAVID WYSS: That probably doesn't affect this Christmas very much, but I think it will start to affect next year, because, as the dollar goes down, prices of imported goods are going to be going up. That's going to add cost pressure. It's going to make it a little more expensive to buy those things.
One caveat there: Most of the decline in the dollar we're seeing is against Europe. Most of the stuff we import tends to come from Asia and South America, where currencies are pretty much stable against the dollar.
JEFFREY BROWN: Of course, Michael Mandel, one of the groups of consumers happy about the dollar -- and there were a number of stories today -- is foreign tourists visiting the U.S.
MICHAEL MANDEL: Oh, that's right, and they're out there. They were out there shopping in the middle of New York City today.
I want to add something to what David said about the dollar, which is that he's right, it doesn't have any direct effect now, but I do wonder if the falling dollar has a psychological effect on Americans, if they see -- if they're forever seeing that the dollar is weak, I think, on some level, it gets to people, and it sort of makes them think that there's something wrong, and it adds to the pressure to pull back.
JEFFREY BROWN: Well, David Wyss, that's interesting. What do you think?
DAVID WYSS: I think that's more than offset by the pressure not to visit Paris. The amount we'll save on foreign trips and the amount that foreigners will bring into the U.S. I think more than compensates for any psychological worry.
Tightened credit lending
JEFFREY BROWN: Now, Michael Mandel, flesh out what you were starting to tell us about what you call a consumer crunch, looking ahead to the end of the year and into next year.
MICHAEL MANDEL: Well, one of the things that we can depend on the most in the American economy over the last 20 years has been the fact that Americans would spend and spend. And they'd keep spending, even if they didn't have money. They'd borrow it. They'd borrowed it off their homes; they'd borrow it on credit cards; they'd borrow auto loans. So it was basically a borrow-and-spend economy.
What I kind of wonder is whether or not we've come to the end of that, not because the American consumer wants to stop borrowing, but because banks and other financial institutions are now going to have to stop lending. And this is where it ties into the subprime problems that everybody has heard about.
You know, what's happened is that, all of a sudden, Wall Street firms are losing lots of money on lending to consumers. And what I think is going to happen over the next few months, I think we're going to see a pull-back, we're going -- you know, there's already been a pull-back in mortgages.
We're going to start seeing a pull-back in credit cards. They're going to have lower limits. Companies are going to tighten up. There will be fewer of them. And all of a sudden, this borrow-and-spend economy will start going in reverse a bit, and Americans are going to pull back.
JEFFREY BROWN: We're going to see that pull-back by lenders? Or are there any clues already that we're seeing it, that less credit is available to consumers?
MICHAEL MANDEL: We've seen it on the mortgages, OK, and we're starting to see it a bit on the auto loans. We haven't seen it yet on the credit cards, but I think it's only a matter of time. I think that the financial institutions have taken such big hits on the subprime stuff, with more hits to come, that they may be forced to pull back, and just for their own self-preservation.
JEFFREY BROWN: David Wyss, what do you see? What do you think about this thesis?
DAVID WYSS: Well, I don't think there's much sign that they're pulling back. And actually, loss rates on credit cards remain amazingly low, much lower than we thought they'd be at this point, about 4.5 percent by our numbers.
But, I mean, Mike's right fundamentally, because certainly home equity loans are going to be a lot harder to get. And people last year took $260 billion -- sorry, $640 billion out of their homes in home equity loans, cash-out refies. That money is not going to be there this year.
Projections for consumer spending
JEFFREY BROWN: So what are you -- David, staying with you -- what are you looking at most carefully over the coming three to six months, say?
DAVID WYSS: Well, obviously the next couple of months, the whole story is going to be retail sales. How many people show up at the shopping mall and how much do they buy?
JEFFREY BROWN: And, Michael Mandel, what's your answer to that?
MICHAEL MANDEL: Well, I think that this holiday season may be the last good times before the bad times come. People are going to keep shopping. They're going to keep shopping out to the end of December.
And then in January, early next year, I think we're going to start seeing the credit squeeze really start to hit for the first time. You know, this is one place -- I mean, David's absolutely right -- you don't see it in the numbers yet. But this is something that's gone on for a long time, this borrow-and-splurge, and it almost has the feeling of a bubble to it. And I think the bubble's about to pop.
JEFFREY BROWN: But you never know when the bubble is about to pop, right?
MICHAEL MANDEL: I'm willing to sort of bet that this is the moment, that this is the moment when the bubble is about to pop, not from the consumer side, but from the lender side.
JEFFREY BROWN: And, David Wyss, you're just going to take a wait-and-see approach?
DAVID WYSS: I think we're underestimating the ability of the American consumer to keep spending. I do think they've got to pull back. I worry that us baby boomers are rapidly approaching that cliff of retirement without much of a parachute. We should be starting to save, but I'm not as convinced as Mike that we're going to.
JEFFREY BROWN: All right, David Wyss, Michael Mandel, thanks both very much.