Households were clearly less optimistic in December, reflecting worries over the stock market, election uncertainty, and downbeat headlines. But while consumer spending is slowing, fourth-quarter outlays appear to have held up well. Moreover, much has been made of weak holiday spending, but 2000's retail performance is being judged against the extraordinarily strong sales of yearend 1999. Retail performance in 2000 will surely pale in comparison to the 1999 binge, but it will still be consistent with a healthy, if slower, pace of consumer spending. But while the slowdown is broad, keep in mind that declining auto production has accounted for a disproportionately large share of the weakness.
Autos account for much of the inventory overhang in the economy right now.
In fact, they are responsible for all of the recent rise in the ratio of inventories to sales in the retail sector. Another key factor in manufacturing's softness is the slowdown in output of high-tech goods. But even here, circumstances appear to be extraordinary. The production surge followed a yearend 1999 slowdown, as companies froze their tech budgets in advance of the Y2K change on the world's computers. Now, tech output is slowing, but to a more sustainable pace.