Buying spree adding new debt

By William Sluis
Chicago Tribune

Those who puzzle over how the economy manages to keep accelerating note that no matter how rapidly consumers find their incomes growing, they manage to spend even faster.

As "shop till you drop" attitudes reign, consumer spending is helping the economy. But debt is accumulating. Advertiser library photo • July 17, 2002

Meanwhile, consumer debt has reached an unheard of $2 trillion.

The question is whether Thursday's report on January retail sales will show Americans have reached a spending limit and are putting away their credit cards.

Chicago economist Brian Wesbury expects sales to show a gain of 0.3 percent, on top of the 0.5 percent advance in December. The latest number would have been stronger, he said, if blasts of zero-degree weather hadn't steered potential buyers away from auto dealerships.

"The weather was so cold that people couldn't get out to look at new cars. However, when we exclude car sales from the mix, retail sales last month were up by a solid 0.8 percent," said Wesbury, of Griffin, Kubik, Stephens & Thompson, an investment firm.

He said many merchants basked in what amounted to a late holiday season, as buyers used holiday gift cards to help boost last month's spending.

Wesbury, who believes the country is growing at a 6.3 percent annual clip during the current quarter, says the economy "continues to fire on all cylinders. With tax cuts and low interest rates still in place, there is no reason to expect any kind of slowdown."

Speaking of interest rates, consumers will be on the alert Wednesday for congressional testimony by Federal Reserve Chairman Alan Greenspan, which may give clues as to the timing of any change in monetary policy.

With the central bank recently altering verbiage to say policy-makers "can be patient," no one is quite sure when Fed members will want to place a leash on an outpouring of cash that has produced the lowest interest rates since the late 1950s.

Also due out: December business inventories, on Thursday. In recent months, companies adding to their stocks of goods on shelves have helped give manufacturing an added jolt.

A surprise narrowing of the trade deficit in November, to the lowest level in 38 months, prompted critics to point to the declining dollar, which has fallen steeply against the euro and Japanese yen. Analysts expect Friday's report on the trade shortfall for December to show some more modest improvement, to about $37.5 billion from $38 billion.

The greenback's swoon by about 40 percent against the euro has left exports from the continent in dry-dock, arousing fears that Europe is headed the way of Japan, toward an intractable economic malaise.

European leaders have grown angry not only over America's enormous trade gap but over a budget deficit that is headed toward a half-trillion dollars annually. But they realize the only way the United States could strengthen the dollar is to raise interest rates — something that may be many months away.

With fourth-quarter earnings reports largely out of the way, investors in the stock market are wondering what corporations can do to top their recent performances.

Profit comparisons, which have been stellar, are expected to deteriorate as 2004 continues.

Gloomy comments in recent days by giants of the high-tech sector, questioning whether businesses will spend heavily for additional equipment, have done little to quell a mood of unease on Wall Street

But Chicago investment manager William Hummer says the worries are overdone.

"Corporate profits will rise by 17 to 20 percent during 2004, and that should lift all boats in the stock market," said Hummer, of Wayne Hummer Investments.

The main reason tech stocks have taken a pause, he said, is that they did so well last year.

"When a group of stocks has such a rapid run-up, rising by about 50 percent, there are bound to be some disappointments," he said. "A temporary pullback is to be expected."