Consumers more confident than they might think An index falls at high tide

The Outlook

November 01, 1998|By Kristine Henry

THE CONSUMER confidence index fell 9.1 points in October, to 117.3, the lowest in nearly two years and the fourth straight monthly drop, according to the Conference Board, a private research group in New York.

How important is the consumer confidence index?

As the holidays approach, what does the drop mean for retail sales, home sales and sales of big-ticket items?

Tim Martin

Senior economist, NationsBank

One way to put it into perspective is that the level it is now is close to as high as it got in the 1980s, when the economy was doing very well. It's fallen in the last four months, but from levels not seen since the '60s.

Consumer confidence is kind of emotional in its movements, and it tends to swing erratically in one direction or another. People are bombarded with negative feedback from the television news and newspapers; the topic of the day is if we're headed for recession and that's got people scared, and it affects their spending. Economists often joke about the consumer confidence index and say it has predicted seven of the last four recessions.

Retail sales are at an all-time high -- the high was reached last December -- and after you've been growing as long as we have -- close to eight years -- you would expect growth rates to slow down some.

When you look at the consumer confidence index in the mid-'80s, it went from 106 to 85 and we didn't have a recession. Now it's 138 to 117; you have to look at the level it fell from. What you have now is a moderation in people's expectations and a more realistic outlook, but they're still very confident.

Robert Barr

Senior economist, Fannie Mae

We don't regard the index number to be that critical to the forecasting process. What's more critical is the actual spending habits of consumers.

The index can fluctuate with political events. For example, in early '96 during the presidential primary season, a lot of Republicans in New England were talking about how bad the economy was just before the economy started doing very well. There was a lot of talk in the media about how wage growth wasn't keeping up with inflation, and if you look at the January consumer confidence level, it had a downturn in '96. Issues come up that can put a damper on consumer confidence.

Consumer confidence is critical in terms of buying a house. You have to have a certain level of confidence in your job and stability of income if you're buying a house. We had a record summer [in the housing market], reflecting a strong economy and consumer confidence. Now that the consumer confidence number is down, does that mean the housing market's going to slow? You have to look at other fundamentals; there's been some slowing of job growth but mortgage rates are low.

Bill Sharp

Economist, Chase Securities, New York

The consumer confidence index has been pretty weak for the last four months, and the primary source of the weakness is the expectation component. The index is a composite measure of expectations, and present situations and expectations are weighted 60 percent and 40 percent for the present situation. The decline since December was 30 points in the expectation component and that's usually associated with a recession.

It's a very significant concern for us in terms of our economic outlook. It usually portends a pullback in consumer spending, particularly discretionary spending.

There will not be as much of a pullback in housing purchases because mortgage rates are declining as opposed to going higher, so that should mitigate a lot of the weakness on consumer spending from other factors.

On a month-to-month basis you have movements of a couple points, but when the trend is changing, that's significant, and here we think the trend has undergone a significant change.

Consumer spending growth should slow dramatically from the 6 percent we saw in the first half of '98 to 3 percent or less in the last half of '98.

Michael Montgomery

Senior economist, Standard & Poor's Data Resources International

The significance of a particular month's decline can be overestimated, particularly because the Conference Board's survey tends to be rather volatile; the University of Michigan survey is less volatile. Both are showing that confidence ebbed from what it was earlier in the summer, but by any standard other than the last two years, confidence is at an extremely high level.

Instead of being ecstatic, consumers are still very, very happy -- they're just not as ecstatic as they had been. If the deterioration continues, it will start to raise questions about how good Christmas sales are going to be, but at this level the numbers are still quite favorable.

The short-term question is if the drop is reflective of people looking at the stock market or of people's actual confidence. If it was a reflection of the weak stock market, we might see a recovery. University of Michigan reporting in the last few months has shown the bulk of the decline in consumer confidence in households making over $40,000, which suggests the stock market is a culprit in why there was a drop in confidence.

Wealthier consumers are more likely to spend money on big-ticket items -- automobiles, TVs -- and they're more sensitive to the stock market and could have a disproportionate impact on consumer spending.

Pub Date: 11/01/98

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