Confidence in economy at 9-year low

Consumer sentiment index called bad tidings for holiday retailing

28% call situation `bad'

October reading is 79.4

low 90s had been expected

October 30, 2002|By Robert Little | Robert Little,SUN STAFF

American consumers are suffering their worst case of economic jitters in almost nine years, according to figures released yesterday, a spooking that could spell doom for the holiday spending season and any hope for a continued recovery from recession.

The Consumer Confidence Index, a monthly survey designed to measure the public's faith in the U.S. economy and labor market, declined this month to its lowest level since late 1993. Nearly 28 percent of the consumers polled described the current economic situation as "bad."

The index is more of a psychological gauge than a financial one, and economists attribute the decline more to the public's distress over terrorism and the possibility of war than to any reduced propensity to spend. But the plunge far exceeded what most were expecting and prodded Wall Street into a spirited, though short-lived, selling binge.

"Even with a fairly large concession to pessimism, that [confidence index] drop was way out of bounds," said Thomas Carpenter, chief economist for ASB Capital Management Inc., an institutional money management company in Washington. "The issue now is whether it means anything."

"This means that the outlook for the holiday retail season is fairly bleak," said Lynn Franco, director of consumer research for the Conference Board, which publishes the monthly index. "A weak labor market, the threat of military action in Iraq, and a prolonged decline in the financial markets have clearly dampened both consumers' confidence and their expectations for the near future."

The Consumer Confidence Index is watched closely by the economy's soothsayers because consumers account for roughly two-thirds of the nation's spending. The Conference Board polls 5,000 Americans every month and asks them to assess job prospects and business conditions, now and six months in the future, and tabulates a numeric index from their responses.

This month, the index fell for the fifth straight month, to 79.4, down from 93.7 last month. Wall Street economists were expecting a figure in the low 90s. The Dow Jones industrial average plunged 180 points - more than 2 percent - after the surprise report, though it recovered by the end of the day to finish up 0.90 at 8,368.94.

Falling consumer confidence could influence the Federal Reserve Board, which is scheduled to meet next week to consider lowering interest rates. Although the economy has grown in the past four quarters, the recovery has been tenuous.

Updated reports on unemployment and economic growth will be announced by then, however, and those measurements weigh far heavier in economic policy decisions. Besides, some economists predict that the Fed will be unmoved by yesterday's confidence report precisely because the number dropped so resoundingly.

Such a change, they say - without some obvious economic stimulus - can mean only that consumers are reacting to troubling events, which have been abundant.

"We're skeptical of surveys anyway - the economic data send us better signals - but we also know that right now people's attitudes are being influenced by a lot of factors that have nothing to do with the economy," said Mike Englund, chief economist for MMS International.

The fight against terrorism and possible war with Iraq are only the most obvious examples, he said. The sniper shootings probably played a role on the East Coast, and the lockout of dock workers on the West Coast. Even the federal elections can dampen consumer confidence when they fill the airwaves with negative advertisements.

"If there is ever a month in which we are inclined not to believe the confidence numbers, this is it," Englund said.

Carpenter agreed, saying, "I think it's a great tool for psychologists, but it's a useless tool for economists."

Even skeptics say a large drop in consumer confidence is disturbing, however, particularly if it continues into next month and beyond.

Alan Levenson, chief economist for T. Rowe Price, typically gives little credence to the consumer confidence report and considers the recent decline a natural response to recent dips in the stock market.

"But what do those 5,000 people know that I don't know?" he asked. "If all those people are really having trouble finding jobs, then that's information that everyone should pay attention to."

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