Monday Morning: The blue light at the end of the tunnel

I knew we were saved as soon as Kmart reintroduced the “BlueLight Special.”

The budget retailer brought back the promotional gimmick last April, and the memories immediately came flooding back.

I can clearly remember standing amid the aisles of Fruit of the Loom underwear as the blue light came on and the store intercom began to crackle: “Attention, Kmart shoppers! Attention, Kmart shoppers!”The walls reflected blue and white, and the din rose noticeably as shoppers skittered across the sales floor to check out the bargains.

That’s what I call a shopping experience!

They really were the good old days when our economy was the strongest in the world. Of course, our economy is still the strongest. But lately, I admit, I’ve been having some doubts.With the economy reaching stall speed, more than one expert is predicting a recession. Apparently the only thing keeping us out of the soup line is consumer spending.

In July, those resolute consumers came through again. The spree continued apace, confounding Wall Street economists.

Spending on big-ticket items such as cars was robust, and chain-store sales met expectations. Apparently those tax rebate checks that Congress insisted on including in President Bush’s tax cut plan kicked in as expected.

Wal-Mart Stores Inc. reported that consumers who cashed their checks at its stores spent about 25% of their rebates on merchandise.

All in all, it gave me a warm feeling about the economy – except for one other small problem.

Many economists think Joe Six-pack is crazy, stupid or both.

They can’t figure out why consumers keep spending in the face of near-unrelenting news about layoffs. After all, consumer confidence in July slipped compared with the month before.

And what about debt? Consumers have given “maxing out on plastic” a whole new meaning.

Now you can understand why I was uncomfortable with my gut feeling about the stimulative effect of BlueLight specials.

After sizing up all the apparent contradictions, I came to the conclusion that something had fundamentally changed in the economy. Fortunately, on that score, I’m not alone.

Horace “Woody” Brock is president and founder of Strategic Economic Decisions Inc., a Chandler, Ariz., company that specializes in tracking structural changes in the economy.

The fact is, the economy has fundamentally changed. Those comparisons to past recessions, the Great Depression and even the railroad boom and bust of 1894 just don’t wash, he says.

Not surprisingly, the biggest change involves consumers. Since 1993, the economy has generated 21 million net new jobs. No other nation in recorded history has produced as many new jobs in so short a time.

What’s more, 78% of the jobs in today’s economy can be considered “non-cyclical,” he says. Think doctors, government workers, teachers – you get the picture. Slowdowns don’t affect them.

Meanwhile, the number of highly cyclical jobs such as those held by factory workers is at an all-time low as a percentage of overall employment. So unless things get really bad, most people are right to feel confident about their jobs.

And remember all that hand-wringing last year about the decline of the U.S. savings rate into negative territory for the first time ever? A closer look suggests otherwise, he says.

The bottom 60% of wage earners actually increased their savings rate, he says. The next 20% cut their savings rate, but only marginally. Only the top 20% of wage earners cut their savings significantly – by 8.4 percentage points to negative 2%. The government incidentally has since revised its figures. The savings rate last year actually did not fall into negative territory.

In short, this is a capital spending and inventory slowdown. Once inventories fall, Mr. Brock says, capital spending will snap back, and so will the economy.

He expects the gross domestic product to grow by 3% to 3.5% next year, with 6% to 10% gains in the stock market.

To that, I’d just like to add: “Attention, Kmart shoppers! Attention, Kmart shoppers!”

Keep spending.

Keith Girard is the editor of InvestmentNews.