In the world of economic analysis, there are no jagged edges. Everything rises and falls on gently curving rails, and if the numbers don't quite fit, there are always trend lines and moving averages to twist the data into shape.
In the real world, it doesn't work like that. In the real world there are forces that can lead to sudden updrafts and downdrafts in the economy, ones that nobody's forecast called for. And this is important to think about now, because the U.S. consumer is getting hit by a pretty amazing confluence of factors. That may mean that spending is slowing much more sharply than Wall Street expects.
It's not just a cooling economy, but that is part of it. It's not just a softening employment outlook, but that, too, is part of it. It's not higher energy prices; it's not higher interest rates; it's not the downturn in the stock market. It's not any one of those, but when you put all of those things together, consumers are getting badly buffeted. Last Friday, the
University of Michigan's
preliminary December reading on its consumer sentiment index tumbled to 97.4 from November's 107.6. If that persists, it will be the worst drop-off the index, a very good leading indicator on consumer spending, has seen since 1991.
"The pressures bearing down on the consumer are probably a little more intense than most people imagined," says
chief U.S. economist Richard Berner. "That's why the Michigan survey was such a stunner."
Nor does it look like the consumer is going to get any real relief soon. The job market has only just begun to soften, and many economists reckon that for there to be that rate cut everybody is hoping for in the first quarter, the
Fed will need to see the unemployment rate rise above the current 4%. Banks are tightening credit standards, and at 9.5% the prime rate is fairly high in any case. While the stock market appears to have regained its footing, nobody believes the tremendous amount of wealth erased this year is coming back anytime soon.
And then there's that mass of arctic air that's parked itself over the middle of the country.
The population-weighted average temperature in the U.S. last week was about 5 degrees lower than normal and 10 degrees below the year-ago average, according to the
National Centers for Environmental Prediction
. Besides putting an obvious crimp on holiday shopping, that increases demand for already costly home heating oil and natural gas. A lot of what consumers might have spent at the stores went to warming their bones instead.
The good news, according to
Salomon Smith Barney
meteorologist Jon B. Davis (who incidentally sparked an uptick in natural gas futures a week and a half ago when he predicted the encroaching chill), is that the present cold doesn't augur a severe winter. Temperatures will fall within the norm of the last 106 years. The bad news is that normal is colder than you think.
"A historically normal winter is a pretty cold winter if you look at just the last 10 years," says Davis. "Anyone who thinks that this winter is going to have any of kind of features like the last three is going to be in for quite a shock. From a standpoint of national heating demand, this year is the difference between night and day."
And here, consumers take a double hit. Not only must they use more heating oil and natural gas, but they must pay up for both because the industry is ill prepared for the demand characteristics of a normal winter.
"Six weeks ago, we decided that consumption was going to slow to a 2.5% to 3% trend," says
director of U.S. economic research Bill Dudley. "All that's changed in the meantime is we're more nervous about the home heating side of it."
If consumer spending actually is in the process of slipping at a faster clip than forecast, it isn't the end of the world -- so long as the
Federal Open Market Committee reacts by cutting rates, and not just once.
"Things are slowing a lot, and it looks like the fundamentals are going to stay slow," says
Banc of America Securities
chief economist Mickey Levy. "You're not going to see any material rebound until well after the Fed starts to ease. My biggest concern is it moves too gradually."