No easy fix seen for consumer pessimism Economists cite lack of sense of direction

November 01, 1991|By Peter Honey | Peter Honey,Washington Bureau of The Sun

WASHINGTON -- The only way to raise consumer confidence is to give consumers something to be confident about: more jobs, better earnings and, in the long term, a sense of firm economic direction, economists say.

The Commerce Department said this week that the economy rebounded in the third quarter, growing 2.4 percent, but at least two indexes also released this week showed a significant fall in consumer confidence.

They may argue about the depth and duration of the recession, but most economists agree that public spending -- both fruit and seed of economic recovery -- will not easily increase.

"It's hard to tell people they should be spending more when the average American household is already in hock up to their eyeballs," said David Wyss, research director for a Massachusetts-based economic consulting firm, DRI-McGraw-Hill Inc.

Three-quarters of the average family's indebtedness is attributable to home mortgages, and that is one of several factors tending to counteract the government's efforts to stimulate money supply by lowering lending rates, Mr. Wyss said.

Despite successive cuts in interest rates by the Federal Reserve, the prime rate charged by banks remains slightly inflated as the institutions struggle to regain the liquidity lost through overcommitments in the 1980s to a property market that has sunk into morbidity.

White House spokesman Marlin Fitzwater, commenting yesterday on the Federal Reserve's reduction in the federal funds rate (which banks charge each other for loans) to 5 percent, said, "There could be other drops to come."

President Bush, meanwhile, said he was worried about studies that showed consumer pessimism at recession levels despite the 2.4 percent third-quarter rise in the gross national product.

"I'm concerned about those Americans who don't have jobs," Mr. Bush told small-business leaders at a White House meeting.

Speculation continued that the Federal Reserve would lower its key discount rate for a fourth time this year if, as expected, the October unemployment figures rises from the current 6.7

percent, a percentage point worse than a year ago.

But some economists say it is not easy to make money available to consumers simply by lowering interest rates. Other factors, such as the credit squeeze and the growing global interdependence of bond markets, interfere with the flow of money to consumers.

"This may be more than a simple recession, although nobody wants to own up to it," said William Spriggs, economist for the Washington-based Economic Policy Institute. "We are at a point where the economy will probably just sit and idle along until someone wakes up and begins to address the structural problems."

Consumer pessimism is not irrational but rather a genuine response to a steady decline in earnings over the last year, Mr. Spriggs said.

The institute's figures show that real income, taking inflation into account, in September was 0.6 percent lower than in the same month last year and that average income in every month since September 1990 has declined when compared with the previous year.

"It's cemented in people's minds that they are worse off and that things will probably get worse before they improve," Mr. Spriggs said.

"There's a growing sense that nobody is addressing the problem and a sort of frustration with the direction the economy has taken over the last four years.

"These are deep-seated problems that will take time to reverse."

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