NEW YORK — The slow but steady march toward a possible war helped weigh down consumer confidence in the U.S. economy this month to its lowest reading in more than nine years.
This story first appeared in the January 29, 2003 issue of WWD. Subscribe Today.
The Conference Board’s index of consumer confidence, which is based on a representative sample of 5,000 U.S. households, fell 1.7 points this month, albeit to a better-than-expected 79.0 from a revised 80.7 in December, as consumers’ current and near-term outlooks headed in different directions.
With a war with Iraq seen as increasingly likely, consumers have grown progressively wary in their assessment of the near-term future, driving the expectations index down 6.7 points to 81.4 in January from 88.1 in December. On the other hand, the current conditions index improved 5.8 points to 75.4 this month from 69.6 last month.
The overall index is the lowest reading since the 71.9 registered in November 1993, when the country was trying to come out of a recession and unemployment stood at 6.6 percent, as compared with 6 percent today.
“Without a doubt, worry over the geopolitical situation slashed consumer expectations,” John Lonski, an economist with Moody’s Investors Services, said. “Despite an 8.1 percent jump from its nine-year low of December 2002 by the component describing the consumers’ assessment of current conditions, the component measuring consumer expectations of economic activity over the next six months sank by 7.6 percent from November to December.”
Lynn Franco, director of The Conference Board’s Consumer Research Center, said in a brief interview that the lackluster results in January reflect the dramatic decline in the expectations half of the index, as nonstop murmurs about war collided with a weak economic environment overall. She noted that, historically, the expectations index acts as a “shock absorber” for noneconomic events, suggesting that the index can rebound when the economy recovers.
“Overall readings continue to reflect the country’s lackluster economic activity,” Franco said in a statement. “Now, with the threat of war looming, consumers have grown increasingly cautious about the short-term outlook.”
Other key economic indicators were more upbeat. Orders for big-ticket goods manufactured in the U.S. rose modestly in December, while new home sales surged for a second straight month in January.
Lonski said the drop in confidence is being driven by “something beyond what might be considered ordinary economic activity to an immeasurable degree.”
Still, he said the silver lining amid the dark clouds of eroding consumer sentiment and the index itself is the increase in consumers’ take on current economic conditions, suggesting the worst labor market conditions might be in the past.
“The current conditions indicate the health of the labor market has turned brighter for the first time since May 2002, followed by seven straight months of decline,” Lonski said.
On the other hand, Lonski said the monthly reading served as a warning that consumers are worried about how the geopolitical situation might adversely affect the U.S. economy. “The warning here is that until this matter is resolved to the satisfaction of investors, business executives and consumers, the mere danger of conflict will weigh on economic activity.”
The 12.5-point discrepancy between the index’s two components is rare, Lonski said, noting the two usually move together. “There is a lot of concern about the future,” Lonski said about the gap. “A lot of the apprehension might be following from reasons that are external to the ordinary operations of the U.S. economy, like how long and costly will a war be, as well as possible terrorist threats.”
Lonski said that while consumer confidence could get worse in the event of another war with Iraq, the overall index is stronger, relative to the bottom established around the time of the last Persian Gulf War.
Arguing that war would bring about economic improvement, Peter Glassman, a senior domestic economist with Banc One Corp., said a conflict this time around could create greater government spending and increased production, as most wars do. The 1991 conflict was an exception in that it drained defense inventories.
For retailers, however, sales will likely be adversely affected to the degree that the conflict keeps customers at home watching television updates. “Consumers simply will not be in the mood to shop for apparel as long as the outcome of the conflict is in doubt,” Moody’s Lonski said.
Consumers’ expectations over the short term retreated as those anticipating business conditions to sour over the next six months rose to 14 percent from 11 percent, while those anticipating conditions to get better declined to 17.7 percent from 21.1 percent. The labor outlook also grew more dismal as fewer participants said they expected more jobs, a number that shrank to 14.3 percent from 15.4 percent, while slightly more said they anticipate fewer jobs, growing to 20.9 percent from 20.2 percent. Those anticipating an increase in their incomes decreased to 18.4 percent from 19.6 percent in December.
Even with the improved view of current conditions, that barometer remained depressed as well. Those rating current business conditions as “good” increased to 15 percent from 14.5 percent. However, those holding the opposite view edged up to 26.5 percent from 25.9 percent. Consumers reporting that jobs are hard to find declined to 28.8 percent from 29.7 percent. Those claiming jobs are plentiful increased to 14.5 percent from 12.3 percent.