- The Washington Times - Wednesday, January 31, 2001

Consumer confidence plunged again this month, capping the steepest four-month fall since the 1991 recession as consumers reacted to a proliferation of layoffs, soaring energy prices and slumping stocks.

The big drop in the Conference Board's Consumer Confidence Index is likely to prompt aggressive action by the Federal Reserve today to slash interest rates by another half-point, analysts said. Fed Chairman Alan Greenspan warned last week that any "breach in the fabric of consumer confidence" could lead to recession.

The growing pessimism about the outlook for jobs and incomes comes after announcements of tens of thousands of job losses at major companies, from high-tech vanguards like AOL Time Warner to old stalwarts like Montgomery Ward and Sears, Roebuck and Co.

This month's 12.2 point drop in the confidence index brings it to 114.4, the lowest point in four years. Another confidence measure compiled by the University of Michigan has shown a similar precipitous drop, particularly in the past two months.

The Conference Board, a New York business research group, compiles the index by asking consumers what they think about the prospects for business and jobs. The number who think jobs will become less plentiful, for instance, jumped this month to 21.8 percent from 15.7 percent in December. The board tallies all the responses and translates them into its confidence figure.

The biggest fall in confidence this month was in the Midwest, where recessionary conditions prevail in manufacturing plants. Just this week, DaimlerChrysler, which has several plants in the Midwest, announced it was laying off 26,000 workers, or 20 percent of Chrysler's work force in the United States.

Mr. Greenspan said manufacturers have to work off big inventories before they can ramp up production again, and he testified last week that the effect such downsizings have on consumer confidence would be crucial in determining whether the current sharp slowdown in the economy turns into a recession.

"The critical issue we need to address is whether that degree of contraction is enough to breach the fabric of consumer confidence," he said. "At the moment, it has not."

Mr. Greenspan said the economy could bounce back quickly after excess inventories are sold off, in a "V-shaped recovery." But if confidence is breached, he said, "it's a different kind of economy and it could languish for a while."

Mark Vitner, economist with First Union Bank, said yesterday's report likely set off alarms at the Fed and ensures that the central bank not only will cut rates dramatically today but follow up with further rate cuts in the weeks ahead.

"We have not had a decline of this magnitude in consumer confidence over the past 30 years when the economy was not already in recession," he said, referring to the four-month drop from record highs last year. "Consumers sense real trouble in the economy."

Lynn Franco, research director at the Conference Board, said the confidence index has not yet dropped to levels seen in previous recessions, suggesting the economy has not "completely run out of steam."

Consumers remain relatively upbeat about current conditions, she said, but they are gloomy about the longer-term outlook. The board's forward-looking "expectations index" is in "territory normally seen prior to a recession," she said.

"Since apprehension leads to caution and cautious consumers spend less than confident ones, confidence levels in February will be carefully watched," she said. "Further erosion of consumer confidence will create more serious concerns about the overall health of the economy."

While confidence has dropped dramatically, consumer spending so far has held up and appears to have accelerated a little this month after a depressing Christmas shopping season. Economists say the drop in confidence is worrisome only if it translates into a plunge in sales.

Consumers already have taken note of the lower rates, and they are rushing to refinance high-rate mortgages, providing a windfall of cash to pay off debt and make more purchases. Moreover, the prospects for a substantial tax cut have improved dramatically since Mr. Greenspan urged Congress last week to pass one.

"Confidence measures need to be watched carefully," said Debbie Johnson, economist with Deutsche Banc Alex. Brown. "But we think confidence can rebound as fast as it declined as consumers become convinced Congress will join the Fed's effort by cutting taxes sooner rather than later."

Neal Soss, economist with Credit Suisse First Boston, also expects consumers to snap out of their current funk if Congress passes tax cuts.

Consumers are trying to repair their balance sheets after losing money in the stock market last year and going deeply into debt, he said. A tax cut would ease their financial crunch.

He added that Treasury Secretary Paul O'Neill's idea of making the tax cuts retroactive and possibly even putting money immediately into peoples' pockets by decreasing tax withholdings right away is the kind of "cash infusion" consumers need right now.

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