Consumers React to Stock Market Decline

Aug. 9, 2002 -- The stock market's recent drops have put a crimp in Rhys Berryman's lifestyle.

A 63-year old retiree from Great Falls, Mont., Berryman found that his total retirement savings have been almost cut in half, to $1.5 million from $2.9 million, because of the stock market's decline. Now he and his wife, who normally travel three months out of the year in their RV, will travel only three weeks this year and for shorter distances.

With their discretionary income reduced to $500 a month from about $1,500 a month just a year ago, the couple is also cutting back on everyday expenses like eating out and making home improvements.

But for recent graduate Michael Nelson, the market's doldrums and the soft economy have sent the 22-year-old on a spending spree. Recently hired as a computer programmer in Rockford, Ill., Nelson just bought a used BMW for $4,000 less than its appraised value. He was also able to secure an auto loan at 6.25 percent interest — less than the 8 percent and 9 percent rates paid by his friends who bought cars last year.

As for the stock market, Nelson's been on a buying binge there, too, plowing 20 percent of his income into what he considers bargain-basement prices.

The dramatically different reactions of these consumers reflect the impact that the market malaise has had on the American consumer in recent months. While many economic indicators point to a slowing in consumer spending, others show a consumer who is still pulling out the credit cards despite a sluggish economy.

Consumer Crucial to Economy

Representing two-thirds of the nation's gross domestic product, consumer spending has been one of the pillars keeping the economy steady, even amid the recession declared in the spring of last year.

But lately, some signs that the consumer is staying home and eating Ramen noodles are starting to emerge.

Second-quarter GDP, for example, rose a smaller-than-expected 1.1 percent and the first quarter GDP was revised downward to 5 percent from the previously reported 6.1 percent as consumer spending slowed. Purchases by U.S. residents of goods and services increased only 2.8 percent in the second quarter, compared with an increase of 5.6 percent in the first, according to the Commerce Department.

The latest ABCNEWS/Money magazine Consumer Comfort Index showed that Americans' positive ratings of the buying climate slipped to their lowest point since early last year, with 38 percent of Americans calling it a good time to buy things.

Still, the buying climate is near its 39 percent average seen in 16 years of weekly polls and is holding up far better than it did in the 1990-1991 recession, when it bottomed out at 20 percent. Further, although the consumer comfort index has dropped sharply during the last year and a half, at its current -13, it's also much healthier than the -44 average seen in 1992.

Houses, Not Stocks

So if the Dow Jones Industrial Average has slipped around 16 percent since the beginning of May, what's been keeping the consumer going? Low interest rates, a healthy housing market and continued sales incentives have continued to buoy buyers, say economists.

"The consumer isn't in bad shape," says Ethan Harris, co-chief U.S. economist at Lehman Brothers in New York. "The consumer's got bargain-basement prices, tax cuts that boost their income and a mortgage-refinancing boom. All of these things help provide a cushion to the blow of the stock market."

Indeed, data from the Federal Reserve show that U.S. households own about $12.2 trillion in real estate — more than double the $5.7 trillion held in stocks. With housing prices staying strong in many parts of the country, many homeowners have benefited.

"We're in a fairly unique situation," says Scott Hoyt, director of consumer economics for economy.com, a West Chester, Pa.-based research firm. "Yes, the stock market is declining, yet we have rapid home-price appreciation in many parts of the country. You've got a whole set of consumers who are feeling the positive impacts of that right now."

Low interest rates are helping many of these homeowners refinance their mortgages at a lower rate, freeing up some cash to spread around other parts of the economy. The latest survey from the Mortgage Bankers Association of America showed mortgage loan applications up to a new high of 6.2 percent, with refinancing making up 68.4 percent of those applications.

"If you don't own stock but you do own a house, you've done pretty good in the last couple of years," says Harris.

Sluggish Spending Damps Forecasts

Despite those factors, the recent GDP data and other mixed signals from the economy have many economists rethinking how much longer the economy will remain in the doldrums.

Lehman Brothers' Harris says while he does not expect a so-called double-dip recession, in which the economy would slip back into negative growth, he does think the economy is more vulnerable.

As a result, Lehman Brothers recently lowered its third- and fourth-quarter GDP forecasts by 0.5 percent to 2 percent and 2.5 percent growth, respectively, and the firm expects the Federal Reserve to cut interest rates again to further stimulate the economy.

And the National Bureau of Economic Research, the country's official arbiter of boom and bust cycles, said this week that while the decline in economic activity that started last year may have come to an end, the bureau is waiting to pinpoint an end to the recession to wait for further signs of a drop in the economy.

Economy.com's Hoyt says while he's expecting consumer spending to moderate, he doesn't think consumers will throw in the towel altogether.

"We're not expecting spending to decline by any stretch of the imagination," says Hoyt. "Consumers are still benefiting from low interest rates for home and auto sales."

For Berryman's part, he's not getting discouraged. He's sticking with his stock holdings and trying to weather the storm not only by cutting back, but by keeping his sense of humor.

"We have 12 acres," he says. "Next summer perhaps we can park our RV in a different part of our property for a different vacation experience."

ABCNEWS' Dalia Sussman contributed to this report.