CONSUMER CONFIDENCE DECLINES TO ITS LOWEST LEVEL IN 4 YEARS
Byline: Jennifer Weitzman
NEW YORK — Consumer confidence plunged 14 points in January to its lowest level in four years, signaling growing fears a recession is looming.
The Consumer Confidence Index fell 11 percent to 114.4, the lowest level since December 1996, when it registered 114.2. It also was the fourth straight Index decline since the Index rose to 142.5 in September.
Lynn Franco, director of The Conference Board’s Consumer Research Center, said consumers’ increasing pessimism about the short-term outlook has sent the Expectations Index into territory normally seen prior to a recession. Still, she said the report indicated that assessment of current business and labor market conditions, while declining, does not yet suggest the economy has completely run out of steam.
The biggest decline in the monthly report came from consumer expectations for the next six months. The Expectations Index — a measure of consumer sentiment for the short term, which constitutes one-half of the overall index — fell from 96.9 in December to 77 in January, its lowest rating since October 1993, when it hit 66.7.
Moody’s Investors Services’ John Lonksi said the last time the Expectations Index plummeted by double-digits was the summer of 1990, when it fell from 91.8 in July 1990 to 74.2 in August, representing the first two months of the 1990-91 recession.
The proportion of respondents expecting an improvement in business conditions fell to 12.4 percent in January from 16.9 percent in December. Those anticipating conditions to worsen rose to 15.7 percent from 10.1 percent.
The employment outlook is also less favorable. Only 11.6 percent of consumers surveyed this month expected more jobs to become available — down from 14.0 percent last month. Those expecting fewer jobs to become available climbed to 21.8 percent from 15.7 percent. As for income prospects, 23.0 percent of the respondents anticipate a gain, down from 28.3 percent in December.
The Present Situation Index, which measures current consumer sentiment and represents the other half of the overall index, was also less positive, although down less dramatically to 170.5 this month from 176.1 in December. The percentage of consumers who rated current business conditions as “good” declined to 34.8 percent from 40.8 percent. Those rating conditions as “bad” rose to 10.8 percent from 9.5 percent.
The Consumer Confidence Survey is based on a representative sample of 5,000 U.S. households. The index compares results to its base year, 1985, when it stood at 100.
Consumers’ assessment of the labor market did not change significantly. Respondents claiming jobs were “hard to get” increased modestly to 12.8 percent from 12.4 percent.
J.P. Morgan Chase’s Bill Sharp, a senior U.S. economist, said he was surprised by the magnitude of January’s decline as well as how widespread the dips were.
He said prior to Tuesday morning’s news, he believed the drops in confidence over the past three months were similar to those during the world economic crisis in 1998, and could therefore bounce back. Now, he said, the odds are higher than before the country could see a recession, which would have an Index reading near 80.
He said he expects to see the Index to be as low as 100 in the next month or two.
The Consumer Confidence Index also showed a slight decrease in consumers’ appetite to purchase new cars, major appliances and homes, as well a drop in the number of those who plan to take a vacation over the next six months.
“Since apprehension leads to caution and cautious consumers spend less than confident ones, confidence levels in February will be carefully watched,” Franco said. “Further erosion in consumer confidence will create more serious concerns about the overall health of the economy.”
According to Lonski, the report “might diminish the stimulatory effects of lower interest rates.” He said consumers worried about corporate downsizing could downscale their purchasing by spending less or redirecting purchasing to lower-priced retailers.
To help rejuvenate the nation’s economy, The Federal Reserve began a two-day meeting on Tuesday while speculation among economists grew that the Fed would cut interest rates by another half a percentage point. An announcement is not expected until Wednesday afternoon. In earlier remarks, Fed chairman Alan Greenspan stressed consumer confidence levels are a leading indicator of whether the country would move into a recessionary posture. The Index is a key indicator since consumer spending accounts for about two-thirds of the nation’s economic activity.
Calling the Index “shockingly weak,” Lonksi said it remains to be seen whether “this unexpected plunge marks the start of an extended slump for household expenditures.” He said that, while Tuesday’s news serves as a “warning,” a January labor report due out Friday should give a more detailed the economic picture.