Consumers' Confidence Takes Steep Nose Dive

By PETER G. GOSSELIN

Jan. 31, 2001 12 AM PT

TIMES STAFF WRITER

WASHINGTON — Consumer confidence, which policymakers had hoped would act as a firebreak against spreading economic weakness, took its steepest dive in more than a decade this month, a leading business research group reported Tuesday.

Analysts said the report virtually assures that the Federal Reserve will slash interest rates--perhaps by even more than the widely expected half a percentage point--when its policymaking body, the Federal Open Market Committee, meets today.

In a surprise, between-meetings move, the panel cut rates by half a point Jan 3. A second cut of that size or larger would complete the largest one-month reduction in rates since the recession of the early 1980s.

“The Fed is saying, ‘We’ll do whatever is necessary to avoid a recession or make sure it’s short and shallow,’ ” said Richard D. Rippe, chief economist of Prudential Securities in New York.

The Conference Board said its index of consumer confidence dropped more than 14 points in January to 114.4, a signal that Americans are becoming increasingly edgy about their jobs, their incomes and their investments. The decline, the fourth in as many months, was the largest since the recession of the early 1990s.

A Conference Board official said that spreading pessimism about the economy pushed the index’s “expectations” component into terrain “we normally see just prior to a recession.”

At the same time, consumers’ assessment of their immediate situation grew only slightly darker. “We’re sitting right on the borderline here,” said Lynn Franco, director of the New York business group’s consumer research center.

The confidence measure is considered an important barometer of the economy because consumer spending accounts for two-thirds of the nation’s economic activity and is closely tied to how Americans see their prospects. Tuesday’s report took on added weight because Fed Chairman Alan Greenspan warned last week that consumer confidence may be the last line of defense against recession.

Greenspan told a congressional committee that the economy has already slowed to “near zero” and that if consumers quit buying, “it’s a different type of economy and it could languish for a while.”

The new confidence numbers were sharply lower than expected. Most analysts had thought the index would decline a modest two or three points to about 125 from December’s 128.6 level, rather than the 14-plus points it tumbled. They traced the steeper drop to, among other things, higher electric and home heating bills and the arrival of quarterly mutual fund statements.

“Everybody knew the market was going down, but they didn’t know what it meant to them until they started getting those statements,” said Rajeev Dhawan, economic forecasting director at Georgia State University in Atlanta. “Now, it’s hitting them in their pockets.”

The magnitude of the drop in confidence prompted speculation that the Fed might order steeper-than-expected rate cuts in hopes of cheering consumers. But veteran Fed watchers discounted the notion, saying that steeper cuts could make the central bank look panicky.

Most analysts predicted the Fed will cut rates half a point and state that it is ready to cut further if the economy shows more signs of weak ness.

Those signs could come quickly. In addition to the Fed action today, the government is scheduled to release its economic growth figures for the last three months of 2000.

The markets could not seem to decide which way the economy is headed. The Dow Jones industrial average shot up 179.01 points, or 1.7%, 10,881.20, its biggest advance since the Fed’s Jan. 3 rate cut. But yields on Treasury bonds tumbled.

Some analysts noted that although the confidence numbers suggest consumers are losing heart after almost 10 years of growth, other statistics indicate Americans may have some spending left in them.

Major retailers such as Federated Department Stores report that while sales in some categories such as menswear are falling, women’s clothing and jewelry are continuing to sell. Auto analysts say that some car makers are maintaining sales.

“The confidence numbers are a negative for the economy, but they’re not the only things out there,” said Rippe of Prudential.

In addition, a regional breakdown of the consumer figures suggests just how durable Americans’ optimism can be. Among the areas posting the smallest decline in confidence is the Pacific region, even though California has been whipsawed by power blackouts and rising utility bills.

Although the national confidence index dropped 11% between December and January, the Pacific region’s index fell only 8.1%, according to the Conference Board.

Nevertheless, analysts said, both the national and regional confidence numbers are especially troubling because they were the result of surveys taken mainly after the Fed’s Jan. 3 rate cut, which would have been expected to boost confidence.

“The numbers show consumers are quite concerned about the economy and their personal situations,” said Richard B. Berner, chief U.S. economist with Morgan Stanley Dean Witter Co. in New York. “It’s a classic sign that we’re in the early stages of a recession,” he said.

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Consumer Confidence

From a monthly survey of 5,000 U.S. households. Index: 1985=100.

January: 114.4

Source: Conference Board