Consumer Confidence Takes Hit

Consumer confidence slid in December, the sixth decline in the last seven months, increasing concerns that Americans might pull back on spending and weaken an already feeble economic recovery.

The Conference Board said Tuesday that its consumer confidence index fell more than four points in December to 80.3, from a revised 84.9 the month before. The reading was just above a nine-year low of 79.6 posted in October.

Consumers in the Pacific region, including California, registered 75.7, down from 82.1 in November.

Although confidence is a decidedly uncertain measure, economists say that discouraged consumers could endanger the nation’s economic health, partly because spending by businesses hasn’t increased enough to offset the slack if Americans snap shut their wallets as the new year unfolds.

“Consumer spending really has been keeping this economic ship afloat,” said Sung Won Sohn, chief economist with Wells Fargo & Co. “If the primary engine of ... growth falters without a pick-up in business spending, then the economy is in big trouble.”

Further darkening economic prospects, a Gallup Poll released Tuesday found that there are more consumers who are planning to spend less over the next six months than those who plan to boost spending.

Spending by Americans constitutes about two-thirds of U.S. economic activity.

The downbeat reports come on the heels of a terrible holiday shopping season for retailers.

Sales at chain stores open at least a year rose 2.1% in the week ended Saturday, as Americans increased spending immediately before and after Christmas. But that was not enough to rescue the season for merchants, said Michael Niemira, senior economist for Bank of Tokyo-Mitsubishi, who expects that same-store sales will rise a scant 1.5% for November and December -- the lowest mark in 30 years.

Although retailers generally managed to keep sales above the previous year’s levels, they did so partly by slashing prices.

That could reduce fourth-quarter earnings and make it less likely that retailers will invest more in their businesses -- including hiring more workers -- in the first part of 2003, experts say.

“We certainly are facing, I think, a real possibility that we could be seeing an actual decline in economic growth in the first quarter,” Niemira said.

In addition to worrying about jobs, economists say both consumers and businesses are unnerved over the prospect of war with Iraq and other global tensions, including trouble with North Korea. Unless these issues are resolved, the economy will remain wobbly at best, they maintain.

“To me, the biggest uncertainty facing consumers and businesses is geopolitical uncertainties,” Sohn said. “Somehow we need to get that resolved as soon as possible so we can see some light at the end of the tunnel. Right now, it looks pretty dark.”

Steve Cochrane, an economist with Economy.com, agrees that the “fear factor” is the key to where things go from here.

Cochrane predicts that gross domestic product will grow 2% to 2.5% on an annualized basis for the first half of the year. He also said the unemployment rate could climb to about 6.5% by mid-year, from the current 6%.

“The first half of the year probably will be a little disappointing, just like much of” 2002 was, he said.

Some indicators, however, have been positive. Economists say businesses have begun spending more on software and computer equipment in recent quarters.

Further, wage gains have been advancing, albeit weakly, and disposable income growth is strong. In addition, many consumers have more money in the bank as a result of refinancing their homes. And interest rates and inflation remain very low.

Some economists shrugged off the consumer confidence report, saying such indicators often reflect a general sense of gloom that consumers are absorbing from news reports rather than how much they are likely to spend.

Indeed, the Conference Board attributed its survey results to a “continuing mixed bag of economic news.”

“But the major factor dampening consumers’ spirits has been the rising unemployment rate and the discouraging job outlook,” Lynn Franco, director of the Board’s Consumer Research Center, said in a statement.

“Weak retail sales over the holidays clearly reflect the current mood of consumers,” Franco added. “Until there is an improvement in the labor market conditions, there is not likely to be a significant upturn in consumer confidence.”

The survey of 5,000 U.S. households indicates that people feel better about prospects six months from now than they do about the current situation.

The index that gauges consumers’ feelings about the “present situation” fell to 69.9 in December from 78.3 in November. The index that measures what they are expecting six months from now also slid, albeit less severely; it dipped to 87.2 in December from 89.3 the month before.