Signs Suggest Consumer Spending Spree May Be Over Heavy Buying Early This Year Set Stage For Future Austerity

When Sung Won Sohn began shopping for a new car recently, he looked for one he wouldn’t have to replace for a long time. “I buy a new car and then I drive it until it gets pretty old,” said Sohn, who settled on a new Jeep Grand Cherokee because it will endure the harsh winters in Minneapolis, where he’s chief economist at Norwest Corp.

Sohn is like many other Americans who purchased record levels of big-ticket goods like autos and appliances this year. They don’t plan on making more major purchases right away.

“These are durable goods - when you buy one or two they tend to be around awhile,” said Gary Ciminero, an economist based in Providence, R.I.

Not only that, but analysts expect higher borrowing costs and swelling consumer debt levels will lead Americans to cut back on their spending soon.

Recent declines in housing reports and a regional Federal Reserve manufacturing survey are leading some analysts to expect “a significant slowdown in economic growth starting in the second half of the year and continuing in 1997,” said Kathleen Stephansen, an economist at Donaldson, Lufkin and Jenrette in New York.

That means the purchases of homes, autos, and appliances that helped the economy grow at a 3.2 percent annual pace during the first six months of 1996 will taper off this fall, and bring the economy in line with the 2 percent growth levels Fed policy-makers expect.

Up to now, though, signs of a pullback in consumer spending remain hard to come by. Just Friday, for example, the government reported factory orders for big ticket goods were at a record high in July, spurred by surging demand for communications gear, electronics and industrial tools.

Meanwhile, rising incomes and job opportunities propelled consumer confidence to a six-year high in July. That comes after Americans benefitted earlier this year from unusually high tax refunds, automobile rebates and lower house payments resulting from mortgage refinancing.

For the appliance industry, June marked the biggest shipment month in history as producers of major appliances shipped 5.4 million units, up 4.7 percent from last year.

Appliance sales weren’t the only area that jumped in early 1996. Sales of new and existing homes climbed during most of the spring as well, defying a rise of more than one percentage point in interest rates. And consumers bought 3.5 percent more cars and light trucks than they did in early 1995, surprising analysts and industry officials.

In coming months, though, analysts expect to see accumulating evidence that the spending spree has run its course. A hint of that could come Tuesday, when the Conference Board is expected to report that its August gauge of consumer confidence declined to 105.1 from its July high of 107.2, according to a Bloomberg Business News survey of analysts.

Americans may have bought more than they could afford this year, setting the stage for a period of austerity, analysts say.

“They try to maintain their purchasing power by borrowing like crazy,” Ciminero said. “But a big increase precedes a decrease in real life, and on the financial side, because the pace of borrowing can’t continue.”

What’s more, if stacks of unpaid bills aren’t enough to turn off consumers, stores and lending institutions are cracking down on delinquent customers.

At Sears Roebuck & Co., for instance, uncollectible accounts soared 73 percent in the second quarter to $270 million, according to a recent Securities and Exchange Commission filing.

The department store operator, which already has set aside $15 million for future bad debt, says it has put in place a plan to track and pressure clients who fail to pay, and tighten loan standards for those who open new accounts.

Sears isn’t the only lender worrying about debt levels. “We’re not soliciting credit card applications as aggressively as we used to in part because credit card delinquencies have gone up,” said Norwest’s Sohn.

Analysts say the recent rise in mortgage rates also is beginning to make a dent on the housing market and many related areas of the economy.

As consumers discouraged by higher borrowing costs choose to postpone the purchase of a home, they could also delay the purchase of appliances such as refrigerators, dishwashers, carpeting and other furnishings.

If spending wanes on appliances, companies will begin to rein in production to avoid being caught with stockpiles of unsold goods.