Consumers more confident than index suggests

The Outlook

August 01, 1999|By Rachel Sams

THE CONFERENCE BOARD reports that its index of consumer confidence, which measures consumers' willingness to spend, declined in July. The index dropped 3.4 points to 135.6, from a revised 139 in June. The larger-than-expected downturn followed eight months of consecutive gains in the index, which had culminated in a 30-year high and followed the Federal Reserve's move to nudge up interest rates.

Is the drop just a blip after several record months, or does it signify a more pronounced slowing in the economy? Does it mean that Fed Chairman Alan Greenspan has succeeded in getting the message out that he intends to keep a lid on growth?

Cynthia Latta

Principal U.S. economist, Standard & Poor's DRI, Lexington, Mass.

I don't think the downturn in the consumer confidence index signifies very much right now. The index has been running at record highs. I don't think it's down because consumers are anticipating a slowing in the economy -- I think it's down because of the increase in interest rates, which means it won't be so cheap to borrow money or take out a mortgage.

What the Fed has said is that if they see any signs of inflation, they will move quickly to stamp it out. That's not the same as saying they will move quickly to cool down the economy.

I do think there is some downside in the future. We do have higher mortgage rates, which will tend to slow the housing market after an immediate surge because people are trying to jump in ahead of the increased rates. I would expect slightly less exuberant growth going forward than we have seen. We're not looking at any real downturn or increase in the unemployment rate because you don't really see the Fed tightening. It doesn't look like inflation is going to pick up right away.

Alan Levenson

Chief economist, T. Rowe Price Associates Inc., Baltimore

The June consumer confidence reading was an all-time high. In a very short period of time, from October to June, the index has risen 20 points. The "present situation" [a component of the index], to my eye, is the one that gives a clearer reading of what's going on in the economy, and it rose. That tells me the consumer feels good about what's going on in the economy. Consumers still have good wealth creation and good job growth going for them in terms of looking around and thinking how well-off we are.

I don't think we're at the point that consumers have gotten the message that Greenspan wants to slow the economy and is willing to do what it takes to get that done. I'm not sure that message got out in time for the consumer confidence survey -- I don't think even financial markets got the message until Greenspan's Humphrey-Hawkins testimony. The consumer needs a series of rate hikes or a sustained correction in equity markets to get that message.

I see a return to more normal economic growth levels in the future. Perhaps there will be a period of sub-par growth. With global economies recovering, there will be more competition for investment dollars around the world.

Kathryn Kobe

Vice president and senior economist, Joel Popkin & Co., Washington, D.C.

I think there are reasons why consumers might be a little less confident -- you have a little bit higher interest rates. I do think the economy is slowing down, although I think there is no danger of a recession.

Certainly the Federal Reserve has been pretty clear -- perhaps people haven't wanted to believe it. Now it's the case that they're actually seeing a little bit higher interest rates. Whether the average consumer listens to the Fed, I don't know if they do or don't.

You don't see the types of imbalances in this economy that you usually see immediately before a downturn, such as building up unwanted inventories and that sort of thing.

I think for the rest of this year and next year, we will continue to see some growth. I do believe the economy has been growing too strongly, given how tight the labor market is. What the Fed wants is to have the economy slow naturally, and I think we're seeing some signs that it is slowing down.

Mark Vitner

Vice president and economist, First Union National Bank, Charlotte, N.C.

The drop in the index reflects that we got a bump in interest rates and that there is a little more volatility in financial markets. Consumers believe the economy is in remarkably good shape today. It's kind of hard to envision an environment where things would get any better.

There's been so much attention given to the Fed raising interest rates, and so much anticipation that rates would go up and maybe this would slow the economy -- maybe when consumers were asked what the economy was going to do, they said it was going to slow.

I don't think consumers see [the Fed's raising interest rates] as a signal that they should stop spending -- it may be causing some consumers to pool their spending forward.

The economy has been growing at about a 4 percent rate, and Greenspan sees that as about 1 percent more than is sustainable. We think the economy will slow, but not back down to 3 percent -- more like 3.5 percent in the second half of the year.

The economy is likely to be sustained by some inventory building. Retail sales were so strong in the first half of the year that there's a lot of restocking that needs to take place.

That buildup in inventories is going to add to growth.

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