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Consumers’ Confidence Sinks Lower

Unlike its much larger predecessor in February, the drop in consumer confidence in March - the fourth straight fall - was hardly a surprise.

A protracted war in Iraq could disappoint consumers and lead to “an even lower level of confidence and grayer hair on the heads of retailers,” according to Moody’s economist John Lonski.

A protracted war in Iraq could disappoint consumers and lead to “an even lower level of confidence and grayer hair on the heads of retailers,” according to Moody’s economist John Lonski.

WWD Staff

NEW YORK — Unlike its much larger predecessor in February, the drop in consumer confidence in March hardly came as a surprise.

With the issue of war with Iraq becoming more a question of “when” and less one of “if,” the Conference Board’s monthly survey of consumer confidence of 5,000 households polled through March 18, before the onset of war, dropped for the fourth consecutive time, but the decline was a better-than-expected 2.3 points to 62.5 from an upwardly revised 64.8 in February.

Last month’s plunge of 14.8 points, or 19 percent, was the largest month-to-month slump since the 16.7 percent fall in August 1990, when Iraq invaded Kuwait and touched off the confrontation that followed five months later.

Even with the upward adjustment in the February number, the readings for the last two months remain the lowest since October 1993, when the reading dropped to 60.5 as the U.S. struggled to pull itself out of a recession.

Both near-term and current outlooks retreated, the Expectations Index by 3.2 points to 62.5 in March from 65.7 in February and the Present Situation Index by 1.1 points to 62.4 this month from 63.5 last month.

“Consumers were more certain [about the war] as we entered March,” Peter G. Glassman, senior domestic economist with Bank One Corp., said.

Rebounding from a 3.6 percent drop on Monday, its worst performance of 2003, the Dow Jones Industrial Average rose 65.55 points, or 0.8 percent, to 8,280.23 on Tuesday as investors waded their way through reports of an anti-Saddam uprising in Basra, a move in Congress to trim the Bush tax cut and the confidence results. (See related story, page 6.) The Standard & Poor’s Retail Index rebounded even more boldly, with a 2 percent rise to 279.96.

Attributing the 3.5 percent decline in the confidence index to the war, heightened government terrorism alerts and higher oil prices, John Lonski, an economist with Moody’s Investors Services, warned the index could get worse if the war in Iraq goes on longer than expected and the troops are confronted with fierce opposition.

On the other hand, Lonski said a successful resolution of the matter will lead to an immediate rebound in consumer spending, but he said spending growth will fall significantly below its pace during the late Nineties into 2000. Retailers could then expect comparable-store sales to improve, but at an annual rate of growth of no better than 2 percent, compared with an average of 5.5 percent for the years 1997 to 2000.

“If there is a lack of progress made in removing Saddam, then we could see an even lower level of consumer confidence and grayer hair on the heads of retailers,” Lonski said.

In addition, Lonski noted that the employment perspective among survey respondents had worsened from last year and said retailers shouldn’t expect to see an improvement in consumer spending until there are signs businesses are looking to hire again.

Highlighting the toll the war against terrorism has taken on the economic environment, consumer confidence has fallen dramatically since it peaked at 144.7 in both January and May 2000, descending toward the 55.1 measure of January 2001, at the start of the first Persian Gulf War.

“While a quick and successful outcome in the Middle East conflict would certainly ease some of the uncertainties facing consumers and therefore boost confidence, it is the economic fundamentals that will determine whether a rebound is sustainable,” Lynn Franco, director of The Conference Board’s Consumer Research Center, said. “The end of the Gulf War in 1991 produced a surge in confidence, but labor market conditions quickly diminished the spark. So if history repeats itself, the current job scenario will do little to maintain any postwar surge in confidence.”

Consumers’ appraisal of the current business environment mirrored last month’s readings. Those rating present business conditions as “bad” remained virtually unchanged at 29.8 percent. Those holding the opposite view accounted for 13.8 percent. Consumers reporting jobs are hard to get rose to 32.3 percent from 30 percent, while those claiming jobs are plentiful remained relatively flat at 11.6 percent.

Consumers’ short-term expectations soured from last month. Those anticipating business conditions will worsen over the next six months edged up to 19.9 percent from 19.1 percent. Consumers anticipating an improvement fell to 13.3 percent from 14.9 percent.

The employment outlook fared no better. Consumers anticipating more jobs to become available in the next six months declined to 11.1 percent from 12.4 percent. Those expecting fewer jobs, however, dropped to 26.1 percent from 28.5 percent. Consumers anticipating an increase in their incomes declined slightly to 15.8 percent from 16 percent last month.