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Consumer getting gloomy
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December 22, 2000: 4:41 p.m. ET
Consumer confidence index posted 4th largest one-month drop in December
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NEW YORK (CNNfn) - In the latest sign of the cooling of the once white-hot U.S. economy, consumer confidence plunged in December, according to the latest measure of that important attitude.
The University of Michigan index of consumer sentiment posted its fourth-largest one-month plunge since the start of the monthly surveys in 1978.
"The last time consumer confidence declined a comparable extent was prior to the recessions in 1990 and 1980," said Richard Curtin, the director of the survey of consumers at Michigan.
In December the index fell to 98.4, still a relatively healthy level, but down from the 107.6 level in November. The index of consumer expectations dropped to 90.7 in December from 101.6 in November, showing consumers are even more concerned about their future prospects than they are today's situation.
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"The last time consumer confidence declined a comparable extent was prior to the recessions in 1990 and 1980."
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Richard Curtin
Director of the survey of consumers
University of Michigan |
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The drop was signaled two weeks ago when the University released a preliminary December reading of the main index that showed a drop to 97.6 from 107.6.
Curtin said it's too early to say this drop is the harbinger of another recession, because the index was still near a 50-year peak before the latest drop. But a recession is a risk if attitudes don't change, he said.
"Consumers have lost their optimism about the outlook for the economy, but they have not become pessimists," said Curtain. "While the December plunge does not indicate a recession will take place in 2001, if losses were to continue during the months ahead, the likelihood of a recession would rise substantially."
Consumer confidence is an important driver of the economy because about two-thirds of the economy is driven by consumer spending. A report on personal income and spending earlier in the day Friday showed consumer spending edged higher in the United States last month, though at a slower pace than the month before.
The Federal Reserve cited "eroding consumer confidence," as one of the factors in its statement Tuesday when it changed its stance from one concerned primarily about the risks of inflation to one more concerned about the risks of a recession.
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"Historically the consumer confidence number can zig and zag, but until unemployment goes up, it won't stay low."
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David Orr
Chief economist
First Union |
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"(Fed Chairman Alan) Greenspan thinks consumer confidence is important, and if he thinks so I guess we should think so," said David Orr, chief economist with First Union. But Orr said he wants to wait to see other measures of consumer confidence in coming weeks, including a survey from The Conference Board due next week and the next University of Michigan measure. He said it's possible that this is simply an aberration, and that unless unemployment starts to climb from its current 4.0 percent levels, he doesn't think consumer confidence will stay low.
"Historically the consumer confidence number can zig and zag, but until unemployment goes up, it won't stay low," said Orr.
He pointed to the drop in the index to 97.4 from 100.9 in October 1998, followed by a relatively quick rebound.
"Then we had the Russian currency crisis and the start of impeachment -- the combination of financial market turmoil and political distress. We just got through having that same mix," he said. "I'm absolutely convinced after looking at 30 years of these numbers that it's the unemployment rate that drives consumer confidence, not the other way around."
Both Orr and Curtin said that recent comments on the slowing of the economy from President-elect Bush and Vice President-elect Cheney could dampen consumer confidence, though. Curtin points out that the 1980 drop came after then-President Carter told consumers that they should stop using their credit cards.
"Consumers came upon this view (of a slowdown) on their own in late November, when Bush and Cheney were talking about counting votes, not the economy," said Curtin. "But now to hear it confirmed by such people tends to reinforce the view there is a slowdown. It hasn't helped."
Curtin said the recent drop in the stock market is a factor in the drop in confidence, especially among the wealthier half of households which are more likely to own stocks and mutual funds.
Even with a strong rally in markets Friday the Nasdaq composite index is off more than 25 percent since election day, while the S&P 500 index, a measure of large-cap stocks, is off nearly 9 percent.
"That certainly is part of the issue," Curtin said. "People have stakes (in the stock market) have noticed these things. If you get to the top quarter or the top 10 percent, then these consumers have mentioned decline in stock market prices much more often."
Among households with annual incomes above $50,000, which is about 40 percent of the nation, the proportion that reported an improved financial situation fell to 56 percent in December from 75 percent in January. The December survey found 45 percent of those households expect a rising unemployment rate, up from 19 percent who were expecting that in the January survey. 
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Surveys of Consumers
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