The confidence of the American household is
something to behold.
Even if it did slip in December on the cold reality of an
impending sharp economic slowdown, it remains high as a kite in
This in spite of a stock market that since last March has
subtracted $1.9 trillion from household wealth, a sum that in
earlier years would have been incomprehensible, even in terms of
the federal budget.
The blow hasn't exactly been shrugged off, but in other years it
might have been a fatal blow. In 2000, however, there were few if
any signs of panic. And only in December did the worries clearly
The wealth decline began last March, but sales of new and
existing homes continued at record-high levels. For the second year
in a row car and light truck sales exceeded 17 million units.
And investors kept investing.
The public did pull back some in December, when retailer
expectations weren't met. But what could retailers have expected,
when the stock market decline alone had taken nearly $50 billion
out of consumer spending.
That $50 billion sum was a huge bite out of the so-called wealth
effect, the factor that, as so many economists explained, allowed
people to feel secure about borrowing and spending even as they
failed to save.
The $50 billion figure, calculated by Standard & Poor's
economist David A. Wyss, is based on what he estimates is the
propensity of households to consume wealth at a 2.5 percent rate.
And even with that much cut out, retail sales didn't decline only
failed to meet hopes.
Even today, Wyss points out, consumer sentiment is at a higher
level than at any time before 1999. Currently, the University of
Michigan survey is in the high 90s. In the past, pre-recession
readings were in the 70s.
And now, perhaps as unrealistically optimistic as the earlier
beliefs that the economy would expand indefinitely, ordinary folks
are looking for signs of an upturn. Even before a soft landing is
Specifically: expectations of a tax cut, confidence that the
Federal Reserve will lower interest rates, signs of bottom-fishing
in stocks, continued interest in real estate, and borrowing to
sustain life styles.
And those consumers who delve deeply into the economic numbers
might even be encouraged by the realization that, while the economy
has lost its bullish power, it may still be expanding, albeit at a
Wyss, for one, cites a slowdown from a 5.1 percent expansion
rate in 2000 to perhaps 2.7 percent in 2001 as enough to cause real
But others might prefer to observe that such a slowdown would
still be an expansion rather than a contraction. And that what we
call a slowdown today is about the average expansion that occurred
in the 1970s and 1980s.