Economist Delos Smith of the Conference Board discusses December numbers indicating crumbling consumer confidence, speaking on CNBC.
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msnbc.com

A disappointing year for the economy ended on a sour note Tuesday with a report that consumer confidence fell sharply and unexpectedly in December. The weak labor market, rising gasoline prices and the prospect of war in Iraq combined to put consumers in a gloomy mood as 2002 drew to a close, analysts said.

The Conference Board, a New York-based business research group, said its Consumer Confidence Index fell more than 4 points to 80.3, compared with expectations that it would rise to about 86. Consumers’ assessment of the present economic situation tumbled more sharply to 69.9, its lowest level in nearly nine years.

The index, based on a monthly survey sampling 5,000 households, is based on a 1985 average of 100.

Stock prices fell immediately after the report on confidence was released, although prices were mixed in light, pre-holiday trading. In any case, the major market indices were headed for a third straight year of losses for the first time since 1939-41. While corporate scandals took a heavy toll on the markets in 2002, declining stock prices also have reflected the frustratingly tepid pace of the economic recovery, which is making consumers increasingly nervous.

In November, the unemployment rate rose to 6 percent, matching an eight-year high, and many analysts predict the rate will climb higher.

“The major factor dampening consumers’ spirits has been the rising unemployment rate and the discouraging job outlook,” said Lynn Franco, who oversees the Conference Board’s consumer polling. “Weak retail sales over the holidays clearly reflect the current mood of consumers,” she said. “Until there is an improvement in labor market conditions, there is not likely to be a significant upturn in consumer confidence.”

While consumers’ assessment of current conditions tumbled more than 8 points in the latest survey, expectations for the future - the other component of the index — fell only 2 points. That was an encouraging sign, said Lehman Bros. economist Joseph Abate.

“While consumers are not confident about current conditions they are a little bit more optimistic about what the outlook holds for the next six months, he said. “And ultimately it is this outlook variable which is closely correlated with consumer spending.”

He said prospects for a possible war in Iraq had made consumers nervous and reluctant to spend, contributing to a weak holiday retail season.

“I think it’s more psychology than fundamentals,” he said. “When this uncertainty lifts, consumers will come back and spend.”

Job market worries

Major Market Indices

The report showed that consumers were increasingly concerned about the job market. Only 12.4 percent said jobs were plentiful, while 29.8 percent described them as hard to get, the worst readings since 1994.

By region, consumer confidence has fallen almost everywhere this year, with New England showing the sharpest decline from a year ago — 23.5 percent. Only in the Southeast has consumer confidence risen this year, and even there it is only because of rising expectations of the future, not the current situation.

While consumer confidence does not always accurately predict behavior, it is closely watched as an indicator of trends in consumer spending, which accounts for two-thirds of economic activity. Despite the declining stock market and weak job outlook, consumer spending held up relatively well in 2002, buoyed by the lowest interest rates since the early 1960s.

But with business spending still lackluster, the economy’s prospects for 2003 still depend heavily on the consumer, said Abate.

“Businesses are also suffering from this same uncertainty that is afflicting the consumer here,” he said. “Eventually the second engine will pick up,” he said, referring to business investment. “But if the first engine starts to flicker and fade and stall, then the outlook for a double dip increases.”

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