Downturn in consumer spending could prolong recession

Mainstream business economists overwhelmingly expect the nation’s 10th postwar recession to end in the first half of 2002. But the rebound, when it comes, is likely to be weaker than normal — after a relatively mild recession. And for investors and corporate executives, the next few months are likely to be filled with anxiety and risk before clear signs of economic growth emerge. A report shows the U.S. economy turned in its weakest performance in a decade in the third quarter, shrinking at an annual rate of 1.3 percent, an even bigger drop than the government previously estimated. One factor that could delay the recovery is a downturn in consumer spending after the low-interest and no-interest shopping spree that left many Americans with new cars, new homes or cash in their pockets from refinancing. David Orr, chief economist at Wachovia Securities, predicted that consumer spending would drop 2.8 percent in the first quarter, in part because of the zero-percent financing that lured buyers into auto showrooms in record numbers in October and November after the near-paralysis of late September. Many of the cars sold with attractive promotional terms were probably pulled forward from 2002, meaning a serious sales hangover for dealers, he and other analysts believe.In addition, Orr said that a lack of year-end bonus income and paltry new year’s raises - along with rising unemployment — will limit consumers’ enthusiasm at the malls in early 2002.“It would certainly prolong the recession, and it would be a major disappointment,” Orr said. But he said his prediction was mostly a “hunch,” based in part on the fact that past recessions have always been accompanied by at least a quarter of declining consumer spending. The failure of Congress to pass an economic stimulus package adds to the likelihood that consumer spending will weaken next quarter he said.Indeed, while consumer sentiment is improving, consumers are spending less. The University of Michigan’s closely-watched consumer sentiment index rose to 88.8 in December from 83.9 in November. However, in a separate report released Friday, the Commerce Department said Americans cut back on their spending in November by 0.7 percent after shopping up a storm in October. Another area of potential weakness is capital spending on technology and telecommunications. In the telecom sector, plagued by overcapacity, capital spending is likely to fall to $58 billion in 2002 from $81 billion this year and a peak of $98 billion in 2000, according to an analysis from Salomon Smith Barney. That means continued tough times for equipment makers like Juniper Networks, Jabil Circuit and Ciena, which have been among the companies to warn recently of disappointing earnings ahead.

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