RECESSION: HOW THE ECONOMY AFFECTS CONSUMERS

COLLEGE STATION – The Sept. 11 terrorist attacks on the World Trade Center and the Pentagon left most Americans with a three major concerns:

– The initial attack and its immediate victims and their families;

– The escalation of armed conflict and its ramifications; and

– The economy and how ordinary people and their families will be affected.

For most citizens, the first two worries remain beyond their personal control. The victims and their families are being cared for by rescue workers and government and charitable agencies, aided by an outpouring of donations from the public; the war effort is in the hands of government and military personnel.

But the economy lives in every household, and each family is directly concerned. And each person and family has a say in how their personal economy unfolds.

“The challenge in this country is to stay level-headed,” said Nancy Granovsky, Texas Cooperative Extension family economics specialist. “I think this is a ‘teachable moment’ for the public because everyone is aware of how inter-connected components of the economy are. Our worst fears about a ‘recession’ are being acknowledged.”

Since late last month, the word “recession” is being used to describe the state of the economy, and that can be frightening to many consumers, she said.

“The turning point came Nov. 26 when the Business Cycle Dating Committee of the National Bureau of Economic Research issued a statement that said the U.S. economy peaked in March 2001,” Granovsky said. “A ‘peak’ marks the end of an expansion and the beginning of a recession. It means that the recession began in March 2001 following a 10-year period of expansion that started in March 1991,” making it the longest economic expansion period in the nation’s history.

But for many consumers – especially those who have never experienced a recession in their adult lives – the “R” word can be frightening. “It’s really nothing to be afraid of. Recession is part of the business cycle,” Granovsky said.

“A normal business cycle has expansion and contraction, peaks and troughs,” she said. “Expansion is the high point and trough is the low point. After the low point is reached, expansion begins again.

“The normal state of the economy is ‘expansion.’ Most recessions are fairly brief. In the past few decades, recessions have been fairly rare.”

Granovsky said the term recession has two accepted definitions: “One (definition) is two consecutive quarters of decline in the Gross Domestic Product,” she said. The other is based on the movement of four economic indicators: employment, industrial production, real personal income and the volume of sales activity.

“We were pointed toward a recession before Sept. 11, even though it had not yet been confirmed” Granovsky said, adding some experts agree that the events of Sept. 11 may have “deepened the economic contraction.”

The Conference Board, a not-for-profit organization which Granovsky described as a very prestigious and highly respected source of aggregate data on the economy, released “An Open Letter to Associates of the Conference Board,” dated Sept. 19 and written by its chief economist Gail Fosler, who pointed out: “While hard conclusions regarding the ultimate economic impact of the attack on the World Trade Center and Pentagon are far from clear, we know (1) the recovery signal from the Index of Leading Economic Indicators was narrowly based in the policy and expectations measures; (2) going into the day of the attack, these measures had begun to weaken, particularly the stock market; (3) the global cyclical slowdown was well established outside of the United States; and (4) consumer attitudes were deteriorating with improving expectations fighting increasing concern about the present economy.”

Fosler went on to write that although the events of Sept. 11 “are unique and unprecedented,” comparing economics conditions now with those that occurred during other times of national crisis can provide some insight. “For example, the assassinations of Martin Luther King Jr. (April 1968) and Robert Kennedy (June 1968) occurred during an economic expansion that was picking up speed (February 1961- December 1969). In contrast, economic conditions on Sept. 11 are similar to those in existence at the time of the Oklahoma City bombing (April 1995) and the Iraqi invasion of Kuwait (August 1990) … In both cases, the U.S. economy was decelerating. In the case of the Oklahoma bombing, the slowdown ended within eight months. On the other hand, in retrospect, we know that the U.S. economy had already entered a recession (July 1990-March 1991) prior to the Iraqi invasion although at that time the economic data were giving mixed signals. The economic trends already under way before such unprecedented and unexpected evenits influence greatly the perceptions of individuals and national responses to these events.”

In other words, although nobody knows for sure what the economy will be like in the future, the picture isn’t necessarily bleak. And consumer outlook is of vital importance.

Consumer spending accounts for about two-thirds of U.S. real Gross Domestic Product, which means consumer confidence plays a key role in the country’s economic status, the Conference Board’s open letter went on. “Consumers differentiate between actual economic conditions and the future. U.S. consumers’ expectations following an unexpected shock, therefore, are more volatile than their assessment of current economic conditions. Because the overall Consumer Confidence Index combines assessment of both current and future economic conditions, it can return to pre-crisis trend within months of an adverse event if underlying economic conditions are strong. …”

Granovsky put it this way: “Consumer confidence dipped significantly in September following the terrorist attacks, and declined again in October and November. If consumers really cut back on spending, the economy will falter. If consumers make irrational investment decisions, they could regret them later on. We have to encourage both prudent spending and prudent investing. Maybe people will be more interested in learning how to protect what they have and make plans for the future.”

But with the news full of stories about more industries facing lay-offs and everyone facing the future’s uncertain economy, many consumers are hesitant to spend freely. Many are re-thinking plans for major purchases, holiday spending and travel.

Granovsky said that attitude is understandable in light of the terrorist attacks and the uncertain future.

Her advice: “Don’t postpone all of your spending goals. The economy needs your money so it can expand. But make sure your spending is in line with your income now, and your expected income in the coming months.

“Consider paying off debts, especially high interest-rate debt,” Granovsky went on. “Learn more about investing and make plans to fully fund your Individual Retirement Account for 2001 – if you haven’t done it yet – and 2002.”

She said the law of physics – what goes up must come down – is true in business too; however, the opposite is also true in business: what goes down will also eventually go up again.

“The economy will expand and peak,” Granovsky said. “We just don’t know exactly when.”

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