- The Washington Times - Wednesday, April 30, 2003

Consumer confidence soared this month, posting its largest gain in 12 years, on optimism spawned by the end of fighting in Iraq, a big drop in energy prices and rise in the stock market.
   Hopes are that consumer spending will surge as well, giving the stagnant economy a boost. But analysts caution that worries about jobs are likely to limit the gains, while rising health care costs are curbing consumers’ wherewithal to increase spending by crimping income growth.
   The jump in the consumer-confidence index from a nine-year low reported by the Conference Board yesterday was the biggest since the end of the first Persian Gulf war in 1991. That gain quickly fizzled out because of anxiety about the jobless economic recovery at the time.
    “The swift outcome in the Middle East has helped quell consumers’ short-term concerns” once again, said Lynn Franco, director of the Conference Board’s Consumer Research Center. She cited reasons to hope the index is registering a lasting turnaround in confidence this time around.
   The recovery from the 2001 recession has been a jobless one so far, but the unemployment rate, at 5.8 percent, is much lower than it was in 1991, and consumer incomes have continued to grow.
   That makes consumers increasingly optimistic about not only the longer-term economic outlook, as they were after the war in 1991, but also about short-term prospects for the economy and their personal finances, Ms. Franco said.
   The brighter outlook today makes it more likely the rise in consumer confidence will translate into spending gains, she said.
   Although consumer optimism about business conditions soared this month, business optimism has not risen in tandem. And consumers were only slightly more hopeful about the job outlook, a reflection of the sharp deterioration of hiring in the weeks surrounding the war, when nearly a half million jobs were eliminated nationwide.
   The loss of income from disappearing jobs and a squeeze on wages caused by burgeoning health care and pension costs came into sharp relief in a second report from the Labor Department yesterday.
   That report showed that labor costs shot up 1.4 percent in the first quarter, the biggest rise in 14 years, stoked by a surge in benefit costs that held wage gains to a subdued 1 percent.
    Benefit costs, particularly health insurance and defined-benefit pension contributions, have been rising at rates of more than 6 percent in the past year, creating headaches for employers while limiting the income gains enjoyed by workers.
   “Those costs are no joke, and we haven’t seen them in a decade,” said Joel Naroff of Naroff Economic Advisers. “The pendulum has swung, and now firms are having to face the medical care squeeze once again.”
   Sharp increases in benefit costs eat not only into wages, but also into corporate profits and have been weighing on the stock market in recent months. Mr. Naroff said businesses are ruthlessly cutting costs elsewhere in their budgets to offset out-of-control benefit costs.
   “Firms are being pushed to the limits,” and are passing on some of the pain to workers by reducing their health coverage, changing health care plans for retirees and slowing hiring, he said.
   Rudolf Thunberg, economist at Reid Thunberg & Co., said he doubts that consumer sentiment will keep rising in view of the pressures on jobs and incomes.
   “The postwar euphoria tends to fade, and the weak labor market is likely to keep consumers cautious,” he said.
   “Confidence matters but jobs matter more,” said Oscar Gonzalez, an economist at John Hancock Financial Services.

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