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December 18, 1981 .----_._---_._._. ___--_._-_ .. ...._-- CoalsandSwitches In the midst of a recession, the Christmas spirit may be somewhat lacking. Indeed, there have been four other recession Christmases in the past quarter-century, most notably in both 1973 and 1974. And once again, after reading front-page stories of faIling employment and income, retailers are filling their advertising pages with ads trumpeting pre-Christmas rather than postChristmas clearance sales. their huge inventories of appliances, perfumes, jewelry, toys and clothing are not sold within this brief time-span, they have little choice but to stage post-holiday or even prehol.iday sales, which bring in the customers but at reduced profitability for the stores. Weakeningenvironment Yet for many retailers, everything depends on this one season of the year. In 1980, December alone accounted for 14.2 percent of all apparel-store sales and for 15.8 percent of all sales of department stores and other generalmerchandise outlets. Also, last year, liquor and TV-appliance stores rang up 11 to 12 percent of their entire sales in the one merry month of December. Moreover, the two months of November and December accounted for more than one-fourth of total apparel and general-merchandise sales last year, as they did in other years as well. Sales prospects this season look unpromising simply because so many potential customers are out of work. In November, 8.4 percent of all civilian workers were unemployed, and the rate seemed likely to approach the 9. O-percent figu re reached towards the end of the 1 973-75 recession-the highest level of the past generation. In the last two months, the jobless rate has jumped almost one full percentage point, following an employment· decline of 940,000 jobs since midsummer. \ Despite weakening employment, real disposable income-a major determinant of retail sales-has been recovering this year from the mid-1 980 recession low. That trend strengthened, at leasttemporarily, in October on the heels of the first (5 percent) stage of the three-stage income-tax reduction. But more to the point, real incomes have been improving because of a deceleration in inflation. (The consumer-price index, after adjustment for the volatile mortgage-financing component, rose at an 8.6-percent annual rate over the past six months, compared with a 1O.O-percent rate of increase over the preceding six-month period.) And every percentage. point decline in the inflation rate represents an even greater boostto consumer income, in real terms, than consumers received from the initial $1 7-billion income-tax reduction. Those two months always provide a strong opportu n ity -and also a danger -for the nation's retailers. In that period, they aim for an enormous volume with only a modest increase in overhead, thereby hoping to create a much higher level of profits. But if Still, most measures show only modest growth or even a weaken i ng of consu mer income over the past decade. For example, median family income (on a real after-tax basis) has fallen below the levels of the late 1970s, and is even nine percent below the Buyers may yet mob the stores and rescue the season with a last-minute rush, as they did last year. But beyond that Iies the larger question of how households will act in the new year, because their spending behavior will strongly influence the way the economy works its way outof recession. (After all, consumer spending accounts for two-thirds of the nation's total spending.) Saving is an increasingly attractive alternative to spending in the current environment, and although dampening current retail-business activity, it servesto boost future buying power by stimulating increased investment and productivity. Christmasscene IP1 ©i1ffiIk\(Q)li Opinions expres,sed in this newsletter do not necessarily ref!ect the views of the management of the Federal Reserve Bank of San Francisco, or of the Board of Governors of t.he Federal Reserve Systern, peak 1 972 level (see chart). This reflects the doubling of inflation indexes over the past decade, as well as the tripling of the Federal burden of income and social-security taxes. The rapid inflation of the past decade made credit usage more attractive, because consumers expected the fixed repayment amounts . to constitute a declining percentage of their inflation-bolstered incomes. Also, the "real" interest rate declined during this period; for example, the personal-loan rate charged by majorfinancecompanies hovered around 20 or 21 percent from 1 976 to 1979, while the personal-consumption price index accelere ated from a 5-percent to a 9-percent rate over that period. Indeed, the reported consumerdebt burden would have risen even more if consumers had not used so much mortgage debt for consumer purposes, with (for example) many homeowners taking out second mortgages in order to convert the capital gains on their homes into spendingpower. The net worth position of consumers (in real terms) appears to have moved in the opposite direction -weakening this year after a sharp improvement over the past decade. Over the 1 969-79 decade, consumer assets (excluding common stock) soared from $1.1 trillion to about $2.6 trillion. Even after adjustment for inflation and debt obligations, the real net worth of consumers rose 23 percent during this period. But the disappearance of inflation-based increases in home equity has now offset part of the earlier upsurge in consumer net worth. The pointtooremember is that , Americans during the 1970s cashed in significant amounts of the increased values of their homes-perhaps $25 billion or more in each of the last several years. That spending stimulus-felt in the markets for cars, campers, education, vacations and other consumer items-is now missing in the wake of the recent decline in home values and tightening of lending terms. Households are no longer I able to obtai n 30-year fixed-rate mortgages at negative real interest rates. To them, housing henceforth will represent only shelter, and not a boundless source of financing for other types of consumer purchases. Other factors also helped boost reported debt figures during this period. With the expansion of credit cards, many consumers began to use credit rather than cash, paying their outstanding balances in full at the end of each billing period. (According to one survey, nearly 40 percent of all bank credit-card debt is repaid during the billing period.) With the upward shift in tax brackets, many borrowers reduced their real debt burdens through itemized deductions of interest payments on their income-tax forms. Demographics also played a part in the upsurge, in view of the growing proportion of the population in the creditdependent 25-44 age category. During this period, 68 percent of families with a head aged 25-44 utilized consumer installment credit, while the proportion dropped to S8 percent for families with a head aged 45-54. Credit expansion Against this background of financial uncertainty, households have become decidedly cautious in their handling of debt. The delinquency rate (30 days and over) for installment loans dropped to 2.30 percent at midyeardown sharply from the 2.94-percent peak of a year ago. Moreover, the ratio of consumer instalment credit to personal income reached 13.3 percentthis September-down sharply from the mid-1 979 peak of 1 4.9 percent. (But until two decades ago, the debt ratio never exceeded 1 0 percent of income.) The recent decline in the ratio may represent an unwinding of the inflationary pressures which stimulated consumers to take on such heavy debt burdens in the 1970s. Credit contraction? These various growth factors may weaken during the 1980s. With the growing maturity of credit-card usage, the cash-substitution factor may not boost the reported credit statistics as much as it did in the past. With the reduction in income-tax burdens, consumers may not utilize itemized deductions as frequentlyas in the past. And although most of the population growth in this decade is concentrated in the 35-44 age category, that 2 ,,-_- cohort may not use much more credit than it did in the heavy borrowing 1970s. Above all, with inflation declining and real interest rates remaining quite high, the debt-financed flight into goods seems much less symptomatic of the 1 980s than of the 1970s. percentage of their income in cash savings as the Western Europeans and nearly as much asthe Japanese. The main reason personalsavings rates abroad are two to three times those inthe U.s. is thattheuse of debt abroad is niggardly." Juster argues that the best way to encourage saving would be to entice consumers to borrow less. Congress could do this, for example, by reducing the subsidiestax deductions for interest payments and property taxes -that have hel ped create such an enormous demand for niortgage debt. That particular proposal may be politically unrealistic, but the recent trend toward reduced credit expansion, by definition, means a boost to the personal-saving rate. At this juncture, saving rather than spending has suddenly gained new respectability. The most enticing advertisements this Christmas are not the retailers' ads for jewelry or electronic toys, but rather the financial institutfons' ads for tax-deferred individual retirement accounts (lRAs). In glittering prose, they describe how a 30-year-old depositing $2,000 a year can, by the magic of compou nd interest, be transformed into ami II ionaire by retirement age. The new tax law, wh i Ie encou ragi ng Ch ristmas buyi ng through the tax-cut approach, may have offset part of that stimulus by encouraging more saving through an expanded IRA program. In sum, retai'lers may experience a lessthan-fabulous Christmas season in 1 981 , partly because of recessi9n pressures on employment and income, and partly because of a shift in attitudes from spending to saving in an environment of reduced inflation. But future Christmases should be brighter'as more households channel their funds into saving and investing, thereby boosting productivity and supporting future gains in living standards. The shifti ng envi ron ment suggeststhat savi ng -not spending-is the "in" thing for the 1980s. This is relevant to the phenomenon described by F. Thomas Juster in the June 29 issue of Fortune: "Contrary to the popular impression, over recent years U.S. consumers have been squirreling away about the same William Burke $Thousands 30 20 -- --- 10 ...., , " " Real after tax income (1981 dollars) - - - - - 1971 1973 --..-"",..- " -_........-- Median family income 1975 3 1977 1979 1981 d II U018U!4seM.4eln • uo8aJO • epei\aN • o4ePI !!eMeH • e!uJoJ!le:) • eUOZ! N • e>iselV @.&Jr@<§@@ )J\ill m )JJt\2?cd1 \\U;;J) BANKINGDATA-TWELfTHfEDERALRESERVE DISTRICT (Dollar amounts in millions) SelectedAssetsandLiabilities LargeCommercialBanks Loans (gross,adjusted) and investments* Loans (gross,adjusted) - total# Commercial and industrial Real estate Loans to individuals Securities loans U.s. Treasury securities* Other securities* Demand deposits - total# Demand deposits - adjusted Savings deposits - total Time deposits -total# Individuals, part. & corp. (Large CD's) Weeki'y Averages of Daily Figures MemberBankReserve Position ExcessReserves(+)/Deficiency (- ) Borrowings Net free reserves(+ )/Net borrowed( -) Amount Outstanding 12/2/81 Change from 11/25/8 i 154,817 133,931 40,527 55,446 23,334 418 411 330 59 3 117 116 - 109 1,778 1,089 460 - 430 - 295 - 269 5,616 15,270 43,320 28,940 30,040 87,202 78,676 33,988 Weekended 12/2/81 Change from year ago Dollar Percent - - Weekended 11/25/81 79 97 5 2 75 95 9,635 10,960 4,001 5,484 626 805 1,103 218 4,524 5,295 723 17,706 18,321 6,759 - - 6.6 8.9 11.0 11.0 2.6 64.3 16.4 1.4 9.5 15.5 2.5 25.5 30.4 24.8 Com Parable year-ago period 99 65 35 * Excludes trading account securities. # Includes items not shown separately. Editorialcommentsmaybeaddressed to theeditor(WiHiamBurke)or to theauthor. ... FreecopieSof this andotherFederalReserve publications canbeobtainedbycallingor writingthePublicInfonnationSection; FederalReserve Bankof SanFrancisco, P.O.Box7702,SanFrancisco 94.120.Phone(415)544-2184.
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