Consumer Confidence Plunges
To Its Lowest Level in Years
But Americans Continue to Place
Faith -- and Dollars -- in Housing
By GREG IP
Staff Reporter of THE WALL STREET JOURNAL
WASHINGTON -- Soaring energy costs, the threat of terrorism and a stagnant job market have sent consumers' spirits plunging to levels normally seen only during recessions.
The Conference Board's index of consumer confidence fell to 64 in February, the lowest level since 1993, from a revised 78.8 last month. The index is beneath the levels hit during the 2001 recession, and is about where it stood for most of the 1990-91 recession.
"If you didn't get a quick resolution" to the situation with Iraq, "this will make it easier to slide into recession, especially if oil prices rise further," said Peter Hooper, chief U.S. economist at Deutsche Bank. Conversely, a quick resolution probably would allow the economy to keep growing.
Sometimes consumer psychology can restrain the economy more than underlying economic factors suggest. "This is one of those times," said Laurence Meyer, a former Federal Reserve governor and scholar at the Center for Strategic and International Studies.
At the same time, many economists and policy makers believe consumer-confidence surveys are of limited use. Indeed, while the Conference Board said 30.1% of consumers now say jobs are hard to get -- the highest number in nine years -- a recent study by Carnegie Mellon University economist Melvin Stephens found households are spending as if job loss isn't a worry. Americans are still making big purchases, too. The National Association of Realtors on Tuesday said existing-home sales rose 3% in January from December to a record.
Tuesday's confidence report appeared to buttress Fed Chairman Alan Greenspan's view that geopolitical risks are the primary restraint on the economy. "Lackluster job and financial markets, rising fuel costs, and the increasing threat of war and terrorism appear to have taken a toll on consumers," Conference Board economist Lynn Franco said in a press release.
The board's index of consumers' assessment of current economic conditions fell to 61.6 from a revised 75.3 the prior month, while their expectations for economic activity over the next six months plummeted to 65.6 from 81.1. The index is based on a mail-in survey of 5,000 respondents.
Mr. Greenspan indicated to Congress earlier this month that the Fed won't cut rates again unless the economy fails to improve once the Iraq crisis is resolved. The Fed is expected to keep its overnight interest-rate target at 1.25% at its next policy meeting on March 18. But Mr. Meyer said the Fed may not have the luxury of waiting for geopolitical risks to dissipate. "I think they're willing to tolerate some near-term weakness because of their expectations the economy will rebound [after the Iraq situation is resolved]. The question is, how much softness are they willing to tolerate?"
Stephen Brown, director of energy economics at the Federal Reserve Bank of Dallas, said the jump in oil prices so far is enough to knock half a percentage point off the current quarter's annualized growth rate. In an economy that is growing normally, that's "like a small child tugging at your belt as you're walking." But "in an economy that's kind of weak, that's enough to keep you close to zero," he added.
The sluggish economy certainly hasn't slowed down the housing market. Home resales rose 3% to a record annual rate of 6.09 million in January, the National Association of Realtors said Tuesday. December sales were revised upward to a 5.91 million annual pace.
Sales likely slowed in February because of last week's snowstorm, the association said. But overall, housing appears to be marching to its own drummer. While the Conference Board found that fewer consumers are planning to pay for a car, vacation or appliance in the next six months, more are planning to buy a home.
David Lereah, the association's chief economist, said homebuying is being fueled by the lowest mortgage rates in a generation, which is bringing homes into the reach of more entry-level, low-income families. It also helps that investors are searching for a more secure and tangible investment than stocks. "Housing can weather war better than other sectors of the economy," Mr. Lereah said.
The inventory of homes on the market rose to 4.5 months' supply in January from December's revised 4.3 months, still relatively tight; the median price for a home -- half sold above the median, half below -- rose 6.7% to $160,400 in January from $150,3000 a year earlier.
Meanwhile, retail sales have been walloped by last week's snowstorm. Bank of Tokyo-Mitsubishi and UBS Warburg, in a joint report, said chain-store sales tumbled 0.8% last week from the prior week, and dropped 1.9% from a year earlier. "Sales improved by mid-to-late week, but that improvement was too little and too late to offset the poor sales performance for the Presidents Day holiday and ultimately for the week," the banks said. |
