JEFFREY BROWN: On the metaphorical opening bell of the holiday retail season, shoppers rushed in. On the real closing bell on Wall Street today, the Dow continued its flirtation with a return to 11,000, a number not seen since 2001.
Our economy watchers today are: David Wessel, deputy Washington bureau chief and columnist at the Wall Street Journal, and Sandra Shaber, a senior advisor at Global Insight, an economic consulting firm.
Welcome to both of you.
David, starting with the stock market, it looks like investors are feeling upbeat right now. What are they saying?
DAVID WESSEL: Well, you are right; the stock market has been up today and a few days earlier this week. And it seems that investors are happy about a couple of things: One is that oil prices are coming down. That's bullish for consumer spending, and for general attitudes on the economy. And I think the other thing that they appear to be looking at is the prospect that the Federal Reserve won't be raising interest rates all that much after Federal Reserve Chairman Alan Greenspan retires in January.
JEFFREY BROWN: And translate that for us; that means that they won't be slowing the economy down?
DAVID WESSEL: Well, when interest rates go up, that means two things to the stock market: One, it's more expensive to borrow both for consumers and businesses. And the other thing is it makes bonds more attractive and people would rather buy bonds when interest rates are high than stocks. So for both those reasons, the stock market generally likes the idea that maybe interest rates will go up another half percentage point or three quarters of a percentage point but not more.
JEFFREY BROWN: When you look at the news over the last few months, Iraq, hurricanes, gas prices, most of it doesn't look all that good. And yet consumer confidence number I saw the other day looked better.
DAVID WESSEL: I think that's really interesting -- that the American economy has proven to be extraordinarily resilient. Something bad happens like Hurricane Katrina or a bad time in Iraq or the president's troubles on one thing or another and the economy takes a little hiccup. But then, at least recently, it seems to come back strong. So despite all the things that you mentioned and more, the economy still is on track to grow at better than 3 percent -- at a 3 percent rate for the next couple of quarters and that seems to be cheering investor.
JEFFREY BROWN: So Sandra Shaber, of course, one of the keys to all this has been the performance of the American consumer. What do you see as we begin the retail -- the holiday retail season?
SANDRA SHABER: There is no question that consumers have done their share if not more than their share in buoying up this economy over recent years. During the holiday shopping season consumer spending for the retailers in general will look pretty good, probably not as good as last year but pretty good.
For the economy in general, however, consumers are not going to be making that big a contribution because of the huge car sale numbers this summer, so a big downturn in car sales in the fourth quarter will mean a lesser contribution from consumer spending. But retail sales should be pretty good.
JEFFREY BROWN: Do retailers have to lure consumers in this year with deep discounts as they had to in some years, or are consumers just walking in on their own?
SANDRA SHABER: This doesn't end. The price promotional business doesn't end. And this is going to be in some ways a stiffer year than ever. For example, in recent years, the discount market has -- was big enough so that all the major discount retailers had a big pie to share. This time they are going to be fighting ever more competitively even for the discount dollar. It's a very, very price promotional holiday shopping season.
JEFFREY BROWN: And what sectors look good, or what items? Even today I was looking at the market, the shares were doing well for Best Buy, Circuit City, Apple. That tells you something.
SANDRA SHABER: Electronics, electronics, electronics, absolutely. Whatever is a new toy, and even some of the older ones. Electronics are obviously a big hit this season as they have been.
JEFFREY BROWN: David, what do you see happening with the retail season?
DAVID WESSEL: Well, I agree with Sandra. It looks like a pretty good season for sales dollars this fourth quarter. As you know, it's a really important season for retailers. About a quarter of the sales of department stores and clothing stores are done at this time of year, a third of the jewelry store sales. I think the interesting question is: What happens as we go into next year? Will consumer spending, American consumer spending finally begin to peter out?
We know that one of the things that's kept American consumers spending is their ability to take money out of their houses: Selling them, refinancing, home equity leans. And as the housing market cools off, that impetus to spending is likely to taper off. And consumer spending growth next year is not expected to be as good as it was earlier this year.
JEFFREY BROWN: This is the question of the housing bubble.
DAVID WESSEL: Right. But one of the reasons the housing bubble has been so important to this is it allowed Americans it to spend even though they weren't getting big raises on the job. If the housing market cools off, they won't be able to take as much money out of their houses. As mortgage rates go up, it won't be as attractive to refinance. And this may be a break on consumer spending.
And the question is whether foreign economies or business investment of spending can pick up the slack and keep the American economy growing at a healthy pace.
JEFFREY BROWN: Well, what other warning signs do you see out there?
DAVID WESSEL: Well, that's one of them. We don't know if the energy scare is past. Energy prices remain high even though they have come down some. We know that the U.S. economy is very dependent on foreign borrowing. That means that we don't save very much money here. Other countries save a lot of money, particularly Europe and Asia. They send their savings to us. That allows our federal government to keep spending more than it takes in. It allows American consumers to spend more than they earn, all without driving up interest rates.
Now every time you look at the economic report someone is predicting that that is about to end. And so far they have been wrong. But things that can't go on forever eventually stop. And the question is: At what point will foreign investors grow a little wary of the U.S. Economy? At what point will there be demand for foreign savings in Japan, for instance, which is doing better? And at what point will we be unable to get this luxury of borrowing money cheap, borrowing basically on credit very cheaply and see our interest rates begin to rise as foreigners want to put their money somewhere else?
JEFFREY BROWN: Well, Sandra Shaber, what pitfalls do you see out there for retailers and consumers?
SANDRA SHABER: There are a couple of other ones that I would like to add to what David suggested. Employment growth has not been very strong in recent months, and, in fact, recent quarters. And that is a real problem for consumers. If we don't get some improvement in the job market, you're going to see consumer confidence falling again. And that is particularly true in some parts of the country.
For example, these recent announcements about layoffs in the auto industry and the related industries are a big problem for those parts of the country. But the job market, in many cases sluggish growth in wages and in household purchasing power, and it's also true that even though gasoline prices have come back down to somewhat less stratospheric heights, we have got problems they had in heating homes this winter, particularly natural gas prices. So there are still some problems out there for consumers in addition to other sectors in the economy.
JEFFREY BROWN: All right, David, help me with one final thing, and maybe Sandra, you too. We always say this is the heaviest, biggest shopping day of the year. I want to try and see if we can put this myth to an end here. I was just reading today that last year Saturday, Dec. 18, a week before Christmas was the actual biggest shopping day, David?
DAVID WESSEL: Well, I noticed my colleagues at the Wall Street Journal have been -- they say it alternates between this Friday being the biggest shopping day of the year or the Saturday just before Christmas. As people have come to expect big discounts and markdowns just before Christmas, there seems to have been a real shift in where the big day is.
JEFFREY BROWN: Sandra Shaber?
SANDRA SHABER: People seem to play chicken with the retailers. Who is going to buy first, who is going to lower prices first? But there is another factor going on here. So many people buy gift cards. And so many people wait for the bargains right after Christmas that a lot of Christmas shopping gets pushed ahead, even past Christmas into January. And January for many of the retailers is the really profitable month.
JEFFREY BROWN: All right, Sandra Shaber and David Wessel, thanks a lot.
DAVID WESSEL: You are welcome.