Posted on: Wednesday, February 26, 2003

Consumer confidence sinks sharply

By Sue Kirchhoff and Barbara Hagenbaugh
USA Today

WASHINGTON — Consumers are fed up. The question is whether they're tapped out.

Consumers' confidence in the economy plunged to its lowest in nearly a decade in February, with shoppers worn down by fears of war with Iraq, a stagnant job market, rising gas prices, falling stock prices, terrorism alerts and likely cabin fever at the end of a rough winter.

The sharp 15-point drop yesterday in the New York-based Conference Board's consumer confidence index was the largest since the 2001 terrorist attacks and mimicked a similar steep decline before the 1991 Gulf War. It raised concerns that Americans might be preparing to stay away from the mall and stay home and watch the news.

Any big pullback could risk a second recession, because consumer spending, which makes up 70 percent of the economy, has been the main pillar holding up the fragile recovery.

"Consumers are looking at the big picture, and they're getting scared," says Oscar Gonzalez of John Hancock Financial Services. "The simple fact is they don't have much left to draw upon. Higher gas prices are cutting into disposable income, and most consumers have already taken advantage of low interest rates."

Such concerns were partly allayed by a second report yesterday that showed home sales rose to a historic level in January. Even the Conference Board report contained signs the strong housing market could last a bit longer. It found the number of people planning to buy a house in the next six months had risen, despite growing financial unease.

Economists caution that consumer spending is more closely tied to real income, which has risen in recent months, than to confidence numbers, which can fluctuate widely. And they point to positive signs for economic growth this year: tame inflation, rising productivity and low interest rates.

Clearly, not everyone is running for the hills.

William Eure, 72, a retired physician in Hattiesburg, Miss., says he's been down this road before and is confident the economy will rebound.

"We take two or three cruises a year, and we're about to buy a new minivan," he says. "We're not doing anything differently than we've ever done."

Still, many called the report cause for fresh concern, especially because more than 30 percent of the people responding said jobs were hard to get — a nine-year high — and only 15 percent expected their incomes to rise in the next six months, an all-time low. Those negative expectations are the most likely to translate into a drop in consumer spending.

Gina Martin, an economist at Wachovia, says her firm expects consumer spending to fall this spring.

Paul Tennis, 43, of Pepperell, Mass., says he's worried about his job after seeing his co-workers laid off.

Tennis' car is 15 years old, but he says he won't replace it until he feels more secure about his job. And he plans to save this year's tax refund.

The report also came amid signs consumers were pulling back from both the stock market and local store and were being hit hard by a spike in gas prices that has many paying more than $2 a gallon.

The Conference Board figures, based on a survey of 5,000 people, showed the third monthly decline in a row.

They were roughly in line with a University of Michigan consumer survey showing confidence at a nine-year low.

More than 30 percent of respondents called current conditions bad, up from 27 percent in January.

Nearly 20 percent expect things to get worse in the next six months, up from 14 percent.