Wednesday, May 23, 2018
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Consumer confidence in steep downturn

NEW YORK - As the Federal Reserve opened a two-day meeting yesterday to set interest rates, a consumer survey reported that people's confidence in the nation's economic health has taken its biggest single-month plunge since late 1990, when the last recession was under way.

Americans remain relatively upbeat about business and employment conditions, but their expectations for the next six months have dropped to the lowest point since 1993.

Since May, those expectations have fallen from near their all-time high to a level far below average, according to the Conference Board, a business research firm in New York that conducts the survey.

“People are reading about gloom and doom and job losses,” said Ian Shepherdson, the chief domestic economist at High Frequency Economics in Valhalla, N.Y., and one of the few analysts to have predicted the extent of the sharp decline in the outlook among consumers.

“They're saying, `It hasn't reached me yet, but I'm hunkering down.'”

The gap between people's attitudes about the climate and their expectations is wider than it has been in the 34 years of the poll.

Economists blamed the dismal outlook among consumers on the steep drop in the stock market late last year and a recent wave of layoff plans announced by major corporations even though the unemployment rate remains at a three-decade low.

Typically, a drop in expectations precedes a decline in consumers' assessment of current conditions.

“People are worried,” said Bruce Steinberg, chief economist for Merrill Lynch. “The confidence index would have to fall a lot more before you have a contraction, but it's not a positive sign.”

Just before the confidence index was released, the Federal Reserve convened a regular meeting of the policy-making committee that sets interest rates. Most analysts predicted the Fed would announce another rate cut of a half of a percentage point today.

Fed Chairman Alan Greenspan, who had engineered a surprise half-point reduction on Jan. 3, told Congress last week that the economy has slowed to a crawl and warned that the nation could fall into a recession this year if consumers become so worried that they sharply curb spending.

As manufacturers have tried to get rid of excess inventories that built in recent months, their production has declined sharply, leading to factory shutdowns and job layoffs, Mr. Greenspan said.

“The crucial issue,” he added, “is whether that marked decline breaches consumer confidence.”

Investors appear confident that a half-point cut in the Fed's target rate for overnight loans between banks, to 5.5 percent, is coming when the central bank ends its session today. In the futures market, trading in federal funds contracts suggested that investors even think a reduction of three-quarters of a point is more likely than a cut of just a quarter-point.

Despite yesterday's sharp drop in the confidence index - which combines expectations and attitudes - it remains higher than it was during all of 1995 and 1996, when the economy slowed but avoided a recession.

Consumer spending appears to be increasing modestly this month, as most large retail chains are selling more goods than they did this time last year, according to the Bank of Tokyo-Mitsubishi. Mortgage applications are rising, too.

But policy-makers have grown alarmed about the swift reversal of people's expectations.

The expectations component of the index - which was 77 this month, down from 97 last month and 119 in May - has reached a level that often coincides with the start of a recession, said Lynn Franco, director of the Conference Board's Consumer Research Center. But the part of the index that covers current conditions - 171 in January, down from 176 in December and 184 in May - suggests that only a slowdown is likely, Ms. Franco said.

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