Consumer Confidence Is Key to Thwarting a Recession

There’s a 40% chance of a recession within the next three to six months, according to some of the country’s leading economists, including Joshua Feinman, chief economist at Deutsche Asset Management, New York. This prediction is based on plummeting consumer confidence levels, as tracked by The Conference Board, New York, as well as increases in mass layoffs and unemployment, as tracked by the Bureau of Labor Statistics. (Mass layoffs are those affecting 50 or more employees.) At press time, consumer confidence was at its lowest level since 1996, according to The Conference Board.

“We’re seeing [economic] mechanisms now that transform small setbacks into large ones,” explains Ed McKelvey, vice president and senior economist for Goldman Sachs, New York. Other observers, including economists surveyed by Blue Chip Economic Indicators, Alexandria, Va., predict that this year’s economy will be the worst since 1991.

Also fueling recession fears are a slowdown in orders to manufacturers, low wholesale sales and inventories (see chart), and weak economic growth. Gross domestic product (GDP) grew 1.4% in fourth quarter 2000 vs. 8.3% in the same period the previous year, according to the U.S. Bureau of Economic Analysis. GDP growth for 2000 is the smallest since 1991, when the economy shrank .2%.

Expect unemployment to hit 4.5% by May, says McKelvey. “Since the end of World War II, the economy has never given us gentle—half or even whole point—increases,” he says.

The economy simply can’t continue to function with labor markets as tight as they’ve been, says Feinman. He expects the unemployment rate to rise to 4.75% by year’s end. “An unemployment rate of 5% may be necessary to restore balance,” he says.

“There’s a lot of recession fear right now,” says Lynn Franco, head of The Conference Board. “If consumer confidence and expectations continue to drop over the next three months, that scenario would be very telling of a recession,” she says. Overall, Franco expects to see unemployment rise another tick or two.

Consumer expectations—their trust in the economy—six months from now are important to economic growth. Because more households are invested in stocks, Feinman sees a possible link between consumer expectations and equity markets. “Last year there was a big sell-off in the equity markets, and we saw consumer expectations drop soon after,” he says.

The profit situation also remains problematic. “The economy is sluggish, and labor costs are rising, thus pressuring margins,” Feinman says. “We need [information technology] growth and productivity advances.”

To prevent consumer confidence from dropping even further—or to turn it around—economists say the following must happen:

  • The government must show it cares, through lower interest rates or possible tax cuts. “Even if those measures fall short of what the government intends for them to do, the efforts could still make consumers feel more secure and continue spending,” says McKelvey.

  • Job security must not be threatened.

  • Real income growth and job availability must continue.

Consumer Expectations* 4th Quarter 2000

October 108.4
November 101.2
December 96.9
January 2001 77.0

Source: The Conference Board, New York

*Consumer expectations are a reflection of positive and negative consumer responses to three economy-related questions.

Consumer Confidence* 4th Quarter 2000

October 135.2
November 133.5
December 128.6
January 2001 114.4

Source: The Conference Board, New York

*Consumer confidence figures are a reflection of positive and negative consumer responses to five economy-related questions.

Unemployment in the Past Decade

Year Unemployment (%)
1990 6.9
1991 8.1
1992 8.9
1993 8.2
1994 7.9
1995 7.0
1996 7.0
1997 6.8
1998 6.0
1999 5.7
2000 4.0

Source: U.S. Bureau of Labor Statistics

The Nation’s RETAIL Unemployment Picture 4th Quarter 2000

Mass Layoffs (50 or more employees) Initial Claims for Unemployment Insurance
October 70 6,624
November 107 13,094
December 199 21,528

Source: U.S. Bureau of Labor Statistics

Gross Domestic Product Growth by Quarter

1st 1999 3.5%
2nd 1999 2.5%
3rd 1999 5.7%
4th 1999 8.3%
Total 1999 4.2%
1st 2000 4.8%
2nd 2000 5.6%
3rd 2000 2.2%
4th 2000 1.4%
Total 2000 5.0%

Source: U.S. Bureau of Economic Analysis