Is the party ending?

Despite upbeat economic readings, it may be a less cheery Christmas than most think.

By Paul Brandus

Oct 3, 2000 | Despite recent reports about rising consumer confidence, robust spending and solid gains in personal income, there are clouds on the horizon that could soon spell economic trouble. And that's likely to mean an end to our freewheeling spending spree of the last few years.

We've already been nailed by high energy prices (get ready for more pain this winter); and there could be a little less Christmas cheer come December. Signs point to a good -- but not great -- holiday season, as folks tighten their belts a notch or two.

Just ask Joanna Wagner, heading in for a morning of shopping at Saks Fifth Avenue. "Last year I spent big," she says. "This year? Probably not as big."

By no means are things bad -- far from it. The economy continues to hum along, inflation and unemployment remain low and consumer confidence remains high. In fact, consumer confidence rose more strongly than expected in September. The Conference Board's Consumer Confidence Index, based on a monthly survey of 5,000 U.S. households, showed that 18 percent of Americans believe the economy will continue to improve over the next six months, up from 17 percent in August.

Last week, the Department of Commerce also reported that our personal income, including wages, interest and government benefits, rose sharply in August, as did our spending.

But all that spending drove down the personal savings rate to a negative 0.4 percent in August, an all-time low, according to the department. In short: We continue to spend, while saving less than ever.

That's worrisome, especially since a big source of cash -- stock market equity -- has diminished in recent months. The Dow Jones industrial average is off 7.4 percent this year, while the S&P 500 is down 2.2 percent and the NASDAQ is off 9.7 percent. It is the worst market performance since 1994, when the NASDAQ fell 3.2 percent and the S&P 500 1.5 percent (though the Dow managed a 2.1 percent gain). The annual double-digit gains of the last five years -- seemingly taken for granted by a new generation of investors -- are no longer expected for the year, especially with many tech, Internet and blue-chip companies warning Wall Street in recent weeks about revenue or earnings shortfalls.

Already, Wall Street's woes are being felt on Main Street, with many investors -- for the first time in years -- seeing the size of their portfolios shrink. If past market downturns are any guide (they usually are), look for an easing in consumer spending. "People don't seem too worried now," says William Griggs, a former U.S. Treasury official and now an economic consultant. "But there is usually a lag time (after a downturn begins) before it has an impact. It may take as much as six months, maybe a bit longer."

Next Page: Scaling back for the holidays

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