Recession Lite

Workers furloughed. Sales down. Retailers overloaded with inventory. Although technically the U.S. economy isn’t in recession, to many in the industry, it sure feels like one.

Yet, among those who monitor the economy, opinions differ. The National Bureau of Economic Research and the Index of Leading Indicators from the Conference Board say we’re not in a recession, but data from the New York-based Economic Cycle Research Institute indicate that we are.

Among leading economists interviewed by JCK, some predicted improvement by the end of the year. Still, no one’s expecting miracles. Larry Lindsey, director of the President’s National Economic Council, told the media that second-quarter economic growth was flat and the economy will likely see only 1% growth in the third quarter and 2% in the fourth. That’s slightly more pessimistic than the consensus from “Blue Chip Economic Indicators,” a monthly survey of 100 leading economists, which predicted 2% growth in the third quarter and 2.9% in the fourth.

Slim-Fast. If things seem particularly bleak now, it’s because the economy has had such a good run for the last few years. “It’s not a recession, but a faster declaration of growth,” says Randall Moore, editor of “Blue Chip Economic Indicators.” He notes that in the first quarter of 2001, the economy grew at a rate of 1.2%. In the same quarter last year, it grew at a rate of 4.8%.

This same psychology is holding true for the jewelry industry. According to preliminary U.S. Census Bureau data from 2000, jewelry sales grew almost 5% in the year 2000. Yet compared with an unprecedented 10.5% growth rate in 1999 and a 9% rise in 1998, 2000 was a letdown. If one charts only year-to-year comparisons, this may be the industry’s worst year in more than a decade—with some estimating that jewelry sales have dipped as much as 5% already. However, these are declines from some record figures.

One encouraging sign is that consumer spending has fallen only slightly. Americans are still buying, just less and in smaller quantities.

And if jewelry seems to have been hit particularly hard, it’s because many of the businesses that prospered during the boom are now seeing drop-offs. Marie Driscoll, a retail analyst for New York’s Argus Research, notes that consumers aren’t splurging on luxuries as they did in 1999, when it seemed as if the stock market was heading forever upwards. “People are being a little more cautious,” she says. “It’s not like people don’t have money, but they are spending it in different ways.” Target and Wal-Mart, for example, are doing well this year, she notes.

One number to watch is the unemployment rate. Research indicates a strong relationship between unemployment rates and consumer spending. At press time, the news on the unemployment front was bleak, with U.S. unemployment claims at their highest level in nine years. The unemployment rate is now 4.5%—half a percentage point higher than the beginning of the year. Lindsey has said he wouldn’t be surprised to see that figure hit 5% by September.

One of the few economists to call this a full-fledged recession is Irving Leveson, economist and owner of Leveson Consulting, Marlboro, N.J. Still, he says this downturn won’t compare to the one in 1991. “That was a broad recession, long lasting and deep,” he says. “This is mild because of underlying strong growth in technology.” Rock-bottom personal savings rates in recent years may have stunted consumers’ disposable income. Data from the U.S. Bureau of Economic Analysis reveal that for the first time in the 42 years the agency has tracked personal savings as a percentage of disposable personal income, consumers are nearly in the red. Consumer debt also has risen quite a bit in the last few years (see table on “Household Debt and Disposable Personal Income”).

In addition, the stock market may face a Catch-22. If there is a recession, consumer spending will slow, leading to lower stock prices. But if things pick up, the recent interest rate cuts and tax breaks could trigger a rise in inflation, leading to interest rate increases and, ultimately, falling stock prices. Not good news, considering the faith many still have in the stock market. “What we really need is a huge stock market rally to turn this [economy] around,” says David Levy, vice chair and director of forecasting for The Jerome Levy Economics Institute of Bard College, Mount Vernon, N.Y. Richard Yammarone, another economist with Argus, agrees. He cites the stock market sell-off as perhaps the biggest reason for the drop in consumer wealth. “We expect continued equity market softness to dampen spending in coming months,” he says.

Results of a recent Wall Street Journal survey of economists about growth in 2001 paint a gloomy picture for investors. Twenty-five out of 54 analysts surveyed say stock prices will remain flat for the rest of 2001, but they expect 2002 to be brighter. Nearly half of the investors queried retain at least 50% of their personal savings in stocks.

Even when the economy rebounds, analysts don’t expect to see another year like 1999 for a long time. Celia Chen, a senior economist with economist.com, thinks the economy should be posting healthy growth again by the end of the year—particularly if the interest rate cuts take effect. Others disagree. “The Fed is getting ahead of itself,” says Leveson. “But, we still have a wonderful long-term future ahead of us.”

Monthly Percentage Changes in Consumer Confidence

Source: The Conference Board, New York.
Oct 00 -4.7
Nov 00 -1.3
Dec 00 -4
Jan 01 -12.2
Feb 01 -7.1
Mar 01 9.5
Apr 01 -7.1
May 01 6.3
Jun 01 2.4
Jul 01 -2.1

Real Personal Consumption Expenditures
Quarterly percentage changes in real personal consumption expenditures on miscellaneous purchases of durable goods, included in the “other” category—which includes jewelry—under durable goods. Figures are inflation adjusted. The information was current at press time, but government data are subject to frequent revisions.

* Preliminary figures at press time.
Source: The U.S. Bureau of Economic Analysis
1Q 99 3.0
2Q 99 1.2
3Q 99 2.8
4Q 99 4.5
1Q 00 3.5
2Q 00 .8
3Q 00 1.6
4Q 00 .7
1Q 01 1.3
2Q 01* 1.0

Unemployment Rates Nationwide

* Preliminary figures at press time.
Source: The Bureau of Labor Statistics
Oct 00 4.1
Nov 00 4.1
Dec 00 4.1
Jan 01 4.2
Feb 01 4.2
Mar 01 4.5
Apr 01 4.5
May 01 4.4
Jun 01 4.5
Jul 01* 4.5

Nationwide Retail Sales of Motor Vehicles, Motor Vehicle Parts and Supplies.
Figures are seasonally adjusted, in billions of dollars.

Sales % over previous year
* Preliminary figures at press time.
Source: U.S. Census Bureau
Dec 99 61.5 9.5
Dec 00 69.8 13.5
Jan 01 69.8 unchanged
Feb 01 70.1 unchanged
Mar 01 69.6 -.6
Apr 01 71.6 3.1
May 01 71.5 4.7
Jun 01* 71.9 4.7

What Makes Up the Real Gross Domestic Product?
When tracking U.S. gross domestic product—the ultimate measure of the country’s input and output of goods and services—there are four financial sectors to monitor: personal consumption expenditures (including retail sales), gross private domestic investments (including commercial and domestic construction and business inventories), net imports and exports, and government consumption expenditures and gross investment. “Real” GDP figures are measured in constant prices and have been affected by changes in physical output, thus being “inflation adjusted.”
Source: The U.S. Department of Commerce’s Bureau of Economic Analysis

Real GDP % changes from Previous Quarters
* Preliminary figures at press time.
1Q 99 3.5
2Q 99 2.5
3Q 99 5.7
4Q 99 8.3
1Q 00 4.8
2Q 00 5.6
3Q 00 2.2
4Q 00 1.0
1Q 01 1.2
2Q 01* .7

Household Debt and Disposable Personal Income
The ratio of household debt payments as a percentage of disposable personal income. Consumer debt payments consist of the estimated required payments on outstanding mortgage and consumer debt.
Figures are seasonally adjusted.

Quarter Consumer Mortgage Total
Source: The Federal Reserve
Q4 1999 7.56 6.09 13.65
Q1 2000 7.63 6.15 13.79
Q2 2000 7.67 6.24 13.91
Q3 2000 7.72 6.34 14.06
Q4 2000 7.82 6.44 14.26
Q1 2001 7.91 6.44 14.35

Nationwide New Home Sales
Figures are seasonally adjusted, in thousands of houses.

Number Sold % over previous year
* Preliminary figures at press time. Source: U.S. Census Bureau
Dec 99 900 -7
Dec 99 1,001 8.7
Jan 01 938 1.3
Feb 01 959 5.3
Mar 01 964 -.1
Apr 01 921 6.5
May 01 907 unchanged
Jun 01* 922 16.3

Nationwide Mass Layoffs and Jobless Claims
Figures are seasonally adjusted.

Mass Layoffs (50+ employees) % Over Year Ago Initial Claims for Unemployment Insurance % Over Year Ago
* Preliminary figures at press time. Source: U.S. Bureau of Labor Statistics
Dec 1999 1,509 -6.5% 162,381 -17.5%
Dec 2000 2,677 77.5% 326,743 101.25%
Jan 2001 1,522 -27.3% 200,343 -11.5%
Feb 2001 1,501 43.7% 172,908 66.5%
Mar 2001 1,527 55% 171,466 60.5%
Apr 2001 1,450 57% 175,911 73.5%
May 2001* 1,426 45% 157,759 71%

Changes in the Consumer Price Index
Percentage changes in the consumer price index for urban consumers. Figures are seasonally adjusted.

all expenditures % changes from preceding month
*Preliminary figures at press time.
Source: U.S. Bureau of Labor Statistics
Jan 01 .6
Feb 01 .3
Mar 01 .1
Apr 01 .3
May 01 .4
Jun 01 .2
Jul 01* -.3

Personal Savings and Disposable Personal Income
Quarterly personal savings as a percentage of disposable personal income. Figures are seasonally adjusted.

* Preliminary figures at press time.
Source: U.S. Bureau of Economic Analysis
1Q99 3.5
2Q99 2.7
3Q99 2.1
4Q99 1.4
1Q00 .8
2Q00 1.3
3Q00 .8
4Q00 1.0
1Q01 1.1
2Q01 1.2