Buyers show hint of caution

Consumer confidence wavers after 8 months of steady climbing

`The euphoria continues'

Economists believe free spending is likely to continue

July 28, 1999|By Greg Schneider | Greg Schneider,SUN STAFF

Consumer confidence slipped in July after eight straight months of climbing to a record high level, suggesting that a recent increase in interest rates succeeded in cooling the feverish economy.

Economists were surprised by the degree of the drop, but said yesterday that they were not worried about cracks in the eerie glaze of happiness that has carried the nation to new heights of prosperity.

"The euphoria continues, and consumers will remain very aggressive spenders," said Mark Zandi, chief economist for RFA of West Chester, Pa.

The July survey showed that the consumer confidence index dropped 3.4 points to 135.6 after reaching a 30-year peak of 139 in June, the Conference Board reported yesterday. The poll of 5,000 households, conducted by NFO Research Inc. of Connecticut, tracks the willingness of consumers to spend.

The index is measured against a baseline of 100 set in 1985, so even the lower July number reflects a phenomenal level of optimism about the American economy, experts said.

"Companies have new opportunities, they're growing, and you don't have the feeling that you're going to lose your job right away. I don't see the end to that yet," said Maureen Allyn, chief economist for Scudder, Stevens & Clark Inc. in New York.

Consumer spending makes up two-thirds of the nation's overall economic activity, so measuring confidence is a key predictor of future health. Traditionally, heavy consumer spending has fueled inflation, which then prompts the Federal Reserve Board to raise interest rates to slow things down.

The recent paradox, though, is that inflation has remained almost nonexistent despite hyperactive consumer spending.

To head off what seems to be an inevitable bursting of the low-inflation bubble, the Fed boosted short-term interest rates by one-quarter of a point last month, and Fed Chairman Alan Greenspan indicated last week that more increases could be on the way, perhaps when the board's policy-makers meet in August.

The June rate increase sent mortgage rates upward, which made a quick and sobering impression on the average pocketbook, Allyn said.

Anxiety about rising rates spurred a surge in home buying and mortgage refinancings.

"You watch the news, you know mortgage rates are at their lowest in decades, and you just get the sense you'd better move now," said John Farrell, who refinanced both a house in Essex Falls, N.J., and a beach house in Benton Beach, N.J., two weeks ago.

Economist Zandi added that a rise in gasoline prices might also have spritzed some cold water on consumers.

But he pointed out that other aspects of the confidence survey continued to show record levels of optimism. Faith in current economic conditions was up, as was confidence that jobs are plentiful.

The Dow Jones industrial average advanced 115.88 points yesterday, closing at 10,979.04.

Economists are not ruling out a move by the Fed to further tighten credit next month, but the Conference Board report indicated the central bank already may have applied sufficient brakes.

It "probably does indicate that the consumer is going to be a little bit more cautious. Even the good economy and low unemployment rate has become old hat," said Donald Ratajczak, director of economic forecasting at Georgia State University.

Allyn said spending will have to decline at some point, but said she would be astounded to see a sharp slowdown any time soon.

"It isn't a stable thing. It's sort of like happiness, you know -- you just can't stay that happy or confident but so long," she said. "But I don't think this is the beginning of a period of self-doubt."

The Associated Press contributed to this article.

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