Higher spending may prevent US recession despite jobs decline
American consumers hold the key to whether the unexpected drop in employment signals a continuation of a gentle slowdown or a tumble into outright recession for the economy.
The question is if after years of spending, Americans are spooked enough now to lock up their credit cards.
A net decline of 4,000 jobs reported by the government on Friday capped a summer of worrisome economic news - soaring mortgage foreclosures, declining housing prices, credit tightening and wild stock market swings. However, consumer spending remained a bright spot.
Now the picture is turning decidedly mixed. While many corporations continue to report strong earnings and predict solid growth for the year, companies from Apple to Office Depot to Harley Davidson have signalled their concerns about consumer spending.
Consumers, whose spending accounted for about 70 per cent of the economy, had already started pulling back, said Joel Naroff, a president and chief economist at Naroff Economic Advisors.
'[If the pullback accelerates] it almost sets off a domino effect. Businesses, which are increasingly uncertain in their spending decisions, could say, 'Why spend into a recession?' Then you've created one', he said.
Apple cut the price on its 8GB iPhone to US$399 from US$599 on Wednesday and later offered US$100 store credits after complaints from buyers who had earlier paid the higher price.
A day later, Kellwood, whose clothing brands and licenses included Phat Farm, Calvin Klein and Sag Harbor, lowered its earnings guidance for this year because of a downturn in consumer spending.
Hovnanian Enterprises, a luxury homebuilder that reported its fourth consecutive quarterly loss this week, is taking an unusual approach - it is slashing prices for three days beginning from Friday in each of its 449 communities nationwide to trim excess inventory.
Harley Davidson joined the parade on Friday, reducing its forecast for yearly earnings. Chief executive Jim Ziemer cited a 'difficult time for the United States consumer' in explaining why he was throttling back shipments of new motorcycles to dealers.
Barbara Nell, a manager of The Daisy Shop, a designer resale shop, said her customers had been merely browsing since the beginning of last month.
However, Marci Kessler, the owner of DoubleTake Consignment Boutique, said business had been brisker than usual lately.
National retail chains are seeing the same push-pull on outlook.
The jobs numbers brings the same mixed picture.
Those who are forecasting a sharp economic slowdown point to numbers showing some industries are contracting dramatically.
The manufacturing industry has lost 215,000 jobs over the past year. Construction employment has fallen by 96,000 since its peak in September last year and more cuts are likely as both residential and commercial building have hit the wall of tighter and more expensive borrowing costs.
Analysts who argued for calm said the details of the jobs picture were nuanced.
They said the labour department showed a good bit of the job weakness was in the government sector, which showed a net decline of 28,000 jobs last month.
In contrast, private sector employers added 24,000 jobs.
'Given how resilient this economy has been in the past two years, with record high oil and [petrol] prices and 17 [consecutive] rate [increases] by the Fed, it's way too premature to bet on a recession,' said Bernard Baumohl, an executive director of The Economic Outlook Group.
