- The Washington Times - Wednesday, February 28, 2001

Consumer confidence, shaken by a fast-deteriorating stock market and economic outlook, fell this month to its lowest level since June 1996, contributing to the biggest drop in home sales in seven years.

Reports out yesterday suggested that two of the most important sources of strength in the economy consumers and the housing market are starting to react to the decline in business conditions that caused a rout in stocks this month and is fueling a recession in manufacturing.

But analysts said consumers' worries about the future are worse than concern about their current financial condition, which remains strong. The 10.9 percent drop in new-home sales last month was from a record-high level of more than 1 million sales a year recorded in December.

"Right now, we see much more of a fear factor for consumers," said Lynn Franco, research director at the Conference Board, which reported a fifth straight monthly drop in its index of consumer confidence yesterday.

The board's index, at 106.5, is down 42 percent from its record high last summer. A confidence measure put out by the University of Michigan earlier this month plunged even further to its lowest level since 1993.

But Ms. Franco noted that the loss of confidence has been fueled by worries about the economy and business conditions, rather than people's own financial experiences, which remain mostly positive.

Consumers appear to be expecting a "severe economic downturn" in the next six months, she said, while they continue to be upbeat about their current jobs and income. They are spending in a way that suggests "moderate growth and not a recession."

Federal Reserve governor Roger Ferguson also pointed out the divergence between rapidly falling consumer confidence and still-solid spending on cars and other items, in a speech yesterday before the Securities Industry Association in New York.

"Despite the sharp weakening in sentiment, household spending appears thus far to have held up well," he said. "How these apparently conflicting signals will be resolved going forward is not at all apparent from today's vantage point, and will bear close scrutiny."

His remarks suggested the Fed is not likely to see yesterday's gloomy reports as a reason to cut interest rates right away, though Fed Chairman Alan Greenspan last month singled out the steep drop in confidence as one of the most worrisome signs that the economy might fall into recession.

Hopes that the Fed would slash rates again as soon as this week buoyed the troubled stock market in recent days.

But yesterday, jitters caused by the plunge in confidence, with no reaction from the Fed, sent the Nasdaq Composite Index down by more than 4 percent or 101 points to 2,208, its lowest level since December 1999.

Mr. Greenspan is expected to shed more light on the Fed's intentions, and how seriously he views the big loss of confidence. He will testify today before the House Banking and Financial Services Committee.

Mr. Ferguson said that while confidence measures provide "an early reading on the direction of household spending," what they are signaling is not clear. Uncertainty about that and the extent of the slowdown poses a challenge for the Fed, he said.

David Orr, chief economist with First Union bank, said the way consumers feel about conditions right now is a better indicator of their behavior than their fears about the future. The number of consumers who believe jobs are plentiful dropped to 42.2 percent from 49 percent last month, he said, but the number who see jobs as "hard to get" remains very low at 12.9 percent.

"This does not look like an emergency," he said, though the Fed probably will see it as a reason to cut rates again, perhaps at the March 20 meeting of its rate-setting committee.

Joel Naroff of Naroff Economic Advisers in Holland, Pa., said fading optimism ensures that the economic weakness will not end any time soon.

But he was skeptical of the drop in home sales, noting that the January sales pace of 921,000 a year, the 11th-highest on record, "was quite awesome" and comes only a month after sales broke the 1 million mark for the first time.

"You want to call that a slump? Not me," he said. "I bet that every developer will take that level of sales for the rest of the year."

Sales of existing homes also fell last month. But Mr. Naroff noted that home prices rose again and more expensive houses took a larger share of the market, "all indications that the housing market is holding up quite well."

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