NEW YORK (CNN/Money) -
December retail sales came in worse than many economists had expected, which may mean that the consumers who've carried the U.S. economy on their backs in recent years are finally giving up. Only many economists doubt it.
The Commerce Department said retail sales rose 1.2 percent in December -- less than the 1.5 percent economists, on average, were expecting, according to Briefing.com. Excluding red-hot automobile sales, driven by bend-over-backward dealer incentives, retail sales were flat, below forecasts for growth of 0.3 percent.
The department also said retail sales grew just 3.4 percent in 2002, the sorriest performance since the government started keeping track in 1993.
Meanwhile, Chicago-based retail-sales watcher ShopperTrak said sales during the 37 days of the 2002 holiday shopping season grew just 1.6 percent from 2001, making it the weakest holiday season since 1990.
Some economists think these are signs that consumers -- whose spending fuels more than two-thirds of the total economy -- have finally had enough, that two years of a lousy stock market, job cuts and rising debts are finally taking their toll.
"Real income growth is deteriorating because of job losses, and income growth is going to remain weak until such time as it's reversed by a tax cut, which is months away at the earliest," said Lacy Hunt, chief economist at Hoisington Investment Management in Austin, Texas. "Then there's a huge wealth loss [from the stock market] and no pent-up demand for goods."
Worse than any other factor, however, could be the mountains of debt consumers have piled up in recent years. With bankruptcies and mortgage foreclosures at record levels, consumers could grow reluctant to keep spending, at least until they get their balance sheets cleaned up.
"The risk to the economy is that we lose the consumer -- and I think we are losing the consumer," Hunt said.
But other economists are not so pessimistic.
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Kathleen Hays breaks down the retail sale numbers by sector and takes a look at the debate over consumers' choices.
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They note that unemployment is nowhere near as high as it was after the recessions of 1990-91 or 1981-82, meaning people still have some pricing power when it comes to wages. After all, if many people are out there looking for jobs, employers don't have to pay as much to keep workers.
Meanwhile, by cutting costs, businesses have become more efficient. Productivity for U.S. businesses outside the farm sector jumped 5.1 percent in the third quarter of 2002; there hasn't been a year with such strong growth since 1950.
Higher productivity helps keep the prices of consumer goods down, making the money people earn worth more and encouraging more spending. Productivity measures how much U.S. workers produce per hour of work.
And interest rates, both short-term and long-term, are the lowest they've been since the Kennedy administration, meaning monthly debt payments are not as steep as they could be.
History is also on the side of growth in consumer spending: the last quarter in which consumers actually pulled back was the fourth quarter of 1991, when the "jobless" recovery from the 1990-91 recession was in full swing.
In contrast, consumers raised their spending throughout the 2001 recession, following the Sept. 11 terror attacks, through a gut-wrenching bear market and all the revelations about accounting scandals at Enron and other companies.
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"It seems to me the historical evidence is we keep on spending unless something totally crazy comes out of left field" said Bill Cheney, chief economist at John Hancock Financial Services.
Of course, if the past couple of years have demonstrated anything, it's that totally crazy things can happen, and there could be plenty of horrors lurking in the tall grass of left field. More corporate scandals could erupt, a war in Iraq could go badly, more terrorist attacks could crop up -- pick your poison.
These sorts of uncertainties could be keeping businesses from spending money and hiring workers, and consumers could be following their lead.
"If you exclude the Middle East, consumer spending will be solid in 2003; the fundamentals are solid," said Delos Smith, economist at the Conference Board, which publishes a closely watched survey of consumer confidence. "But the Middle East does change [the picture]. When you start moving [troops] to the Middle East, that's scary. People react to that, and businesses do, too."
Thus, the whole economy could remain in limbo until there's some resolution of the Iraq situation.
By that time -- maybe in the spring -- some kind of economic stimulus package might already be slouching its way toward birth in Washington. Such a plan will almost certainly include tax cuts and perhaps a more aggressive tax rebate, further encouraging consumers to spend.
"Consumers do need to save because they have to build back their net worth," said Northern Trust economist Asha Bangalore, but they can keep spending and even save some, "mainly because their disposable income is going to rise from the tax cuts."
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