New York Times: America's Mood This Morning!

"People are reading about gloom and doom and job losses," said Ian Shepherdson, the chief domestic economist at High Frequency Economics in Valhalla, N.Y., and one of the few analysts to have predicted the extent of the sharp decline in the outlook among consumers.
"They're saying, `It hasn't reached me yet, but I'm hunkering down.' "

The gap between people's attitudes about the current climate and their expectations for the future is now wider than it has ever been in the 34 years of the poll.

Economists blamed the dismal outlook among consumers on the steep drop in the stock market late last year and a recent wave of layoff plans announced by major corporations even though the unemployment rate remains at a three-decade low.

Typically, a drop in expectations precedes a decline in consumers' assessment of current conditions.

"People are worried," said Bruce Steinberg, chief economist for Merrill Lynch. "The confidence index would have to fall a lot more before you have a contraction, but it's not a positive sign."

Just before the confidence index was released, the Federal Reserve convened a regular meeting of the policy-making committee that sets interest rates. Most analysts predicted the Fed would announce another rate cut of a half of a percentage point today. The Fed chairman, Alan Greenspan, who had engineered a surprise half-point reduction in interest rates on Jan. 3, told Congress last week that the economy had already slowed to a crawl and warned that the nation could fall into a recession this year if consumers become so worried that they sharply curtail their spending.

As manufacturers have tried to get rid of excess inventories that built up in recent months, their production has declined sharply, leading to factory shutdowns and job layoffs, Mr. Greenspan said. "The crucial issue," he added, "is whether that marked decline breaches consumer confidence."

Investors now appear confident that a half-point cut in the Fed's target rate for overnight loans between banks, to 5.5 percent, is coming when the central bank ends its session today. In the futures market, trading in federal funds contracts suggested that investors even think a reduction of three-quarters of a point is more likely than a cut of just a quarter-point.

Despite yesterday's sharp drop in the confidence index — which combines expectations and current attitudes — it remains higher than it was during all of 1995 and 1996, when the economy slowed but avoided a recession.

Consumer spending also appears to be increasing modestly this month, as most large retail chains are selling more goods than they did this time last year, according to the Bank of Tokyo-Mitsubishi. Mortgage applications are rising, too.

But policy-makers have grown alarmed about the swift reversal of people's expectations. Over the last two months, companies — including DaimlerChrysler, J. C. Penney, Xerox, Whirlpool and WorldCom — have reacted to the slowing economy by announcing plans for thousands of job cuts, causing concern among many workers. At the same time, declines in the stock market in late 2000, rising energy prices and falling corporate profits have raised widespread fears about the nation's economic weakness, including warnings from President Bush and some of his advisers that the economy is flirting with a recession.

"We're in a gray zone," said Richard D. Rippe, the chief economist for Prudential Securities. "Consumers are in a fragile condition."

The expectations component of the index — which was 77 this month, down from 97 last month and 119 in May — has reached a level that often coincides with the start of a recession, said Lynn Franco, director of the Conference Board's Consumer Research Center. But the part of the index that covers current conditions — 171 in January, down from 176 in December and 184 in May — suggests that only a slowdown is likely, Ms. Franco added.

The overall index fell to 114, down from 129 in December. It reached its high-water mark of 145 in May. Over the last three decades, every decline as big as the drop in recent months has occurred during a recession, said Mark Vitner, an economist at First Union Bank in Charlotte, N.C.

The index numbers represent the feelings of consumers who are surveyed; the higher the numbers, the more optimistic are the respondents.

The Conference Board says it sends questionnaires to a different group of 5,000 households each month and usually receives responses from about 3,500. The University of Michigan, which publishes the other widely
followed consumer survey, has also reported declining confidence lately.

Many economists consider consumer spending, which accounts for two-thirds of economic activity in the United States, to offer the best hope for sustaining growth in the first half of 2001. Over the last two years, corporate spending on new equipment has accounted for an unusually large portion of growth, as companies have invested billions of dollars in new technology.

Now, with the slowing economy squeezing profits, such investments are being made far less frequently. Through the first half of last year, business spending on capital goods grew at annual rate of 20 percent. In the third quarter, growth fell to 5 percent.

When the government releases a set of statistics on the nation's overall economic activity for the fourth quarter of 2000, business investment is likely to show a decline at an annual rate of about 4 percent, said Robert J. Barbera, the chief economist of Hoening & Company, a brokerage firm in Rye Brook, N.Y.

"A big contributor to growth just left the premises," Mr. Barbera said.

Consumers are sticking around for now, but they seem to be eyeing the exits."