Consumer Confidence Near 5-Year Low

Widespread fears of recession--despite general sentiment that the economy still is doing fairly well--have cut consumer confidence to its lowest level in nearly five years, business researchers reported Tuesday.

The worse-than-expected drop in the consumer confidence index for February, the fifth straight monthly decline for the closely watched predictor of consumer spending, was accompanied by other economic reports that were mixed at best. The federal government said January brought a big drop in new-home sales and generally weak manufacturing orders.

Tuesday’s news intensified interest in the nervous financial markets about the congressional testimony due today from Federal Reserve Chairman Alan Greenspan. In recent days, Wall Street investors have speculated that the Fed might cut interest rates even before its next regularly scheduled policy meeting March 20 to try to spur the faltering economy.

Still, many economists found various encouraging statistics in Tuesday’s reports and discounted such speculation.

Cutting rates before March 20 could backfire, said Sung Won Sohn, the Minneapolis-based chief economist of Wells Fargo & Co.

“It could give the appearance of the Fed panicking again, and that would be contrary to what Greenspan should be doing, which is boosting confidence.”

The latest evidence of the need for a confidence boost came from February’s consumer confidence index. The measure fell to 106.8, down from 115.7 in January and far below May’s record high of 144.7.

Within the consumer confidence figures, however, was a puzzling divergence between the two main components of the index. The component based on expectations of economic performance six months into the future was off sharply, by 10.6 points, to 68.7 in February.

The other component, based on consumers’ feelings about the present economic situation, fell 6.3 points to a still-comfortable 164.1. The Conference Board, the New York-based business research group that maintains the index, said readings of around 80 reflect concerns about recession.

“Consumers are telling us that they’re shaken up about how bad things might get six months down the road. But the other side of the coin is that they’re still telling us the situation right now isn’t that bad,” said Ken Goldstein, an economist with the Conference Board.

The good news, analysts said, is that previous splits in assessing the present and future have preceded periods of economic growth. For instance, the index was in a similar situation in the late 1980s, just before the economy soared. But the split has never been this wide in the index’s 34-year history.

Although Sohn said he doesn’t expect a recession, he added: “To me right now, the danger is this: Will plunging consumer confidence lead to additional and significant cutbacks in consumer spending? . . . If it does, we could be going into a serious and deep recession, but we’re not at that point yet.”

But Diane Swonk, chief economist of Chicago-based Bank One Corp., expressed confidence that consumers, whose spending accounts for two-thirds of economic activity, will keep spending.

“People tend to spend in line with the money in their pocketbooks and their current financial condition rather than what they say they feel about the economy. Actions speak louder than words,” she said.

Swonk and some other economists said recent headlines about major layoffs, the weak stock market and the Bush administration’s comments about the danger of recession may have heightened consumers’ concerns about the future. That, she said, might partly explain the big gap between the two components of the consumer confidence index.

On the other hand, Richard B. Berner, chief U.S. economist for Morgan Stanley Dean Witter & Co., interpreted the numbers as suggesting that the economy continues to deteriorate and that consumers have recognized the trend.

The new-home sales report, however, provided mixed signals about what consumers may do. The report showed new-home sales falling 10.9% in January, the biggest percentage drop in seven years, with the steepest declines coming in the West and Northeast.

However, December’s sales level was revised upward to a record high, which made the month-over-month decline seem more worrisome than it was. Many analysts predicted that falling mortgage rates will keep demand strong.

Berner said the new-home sales figures tend to be erratic and, consequently, he doesn’t put much stock in a single monthly report. Still, he said, the sales numbers “convey a sense of strength. Homes sales haven’t fallen out of bed.”

Further evidence of the struggles of the hard-hit manufacturing sector came in a report showing a 6% decline in orders of durable goods. Most of the decline came in the volatile transportation sector, largely reflecting aircraft manufacturing. Excluding transportation, the gauge was down a far less frightening 0.3%.

And even in the durable-goods report there was a sign of hope: Non-defense capital-goods orders, excluding aircraft, rose 6.5%, its first gain since September. It partly reflected a rise in orders for computer equipment, a finding that counters current concerns that businesses are cutting back on technology spending, a trend that could hit California hard.

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Consumer Confidence

Here is a look at the consumer confidence index from a survey of 5,000 U.S. households. Index: 1985=100.

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Current: 106.8

One month ago: 115.7

One year ago: 140.8

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Source: The Conference Board

Associated Press / Los Angeles Times