Looking Back at Consumer Sentiment in 2001

Both the Conference Board and the University of Michigan's Index of Consumer Sentiment seem to be signaling a slow improvement in consumer confidence. This is welcome news for growth prospects in the coming months, although the modest gains hardly signal a return to optimism. The figure below indicates how far and fast the Michigan index fell over the past 18 months. Of the total decline of 30.2 Index points from January, 2000 to September 2001, only 7 points have been regained, and those only recently (the figure shows quarterly readings).

Like other economic indicators, consumer confidence has exhibited decidedly unusual trends through this recession. The Michigan index declined by a larger amount in 2001 compared with 2000 than in any prior year during the past half-century. It dropped 17.0 percent during 2001, just beating out the decline of 16.9 percent in 1979. But Michigan survey director Richard Curtin notes that the composition of the decline rather than its size is the distinguishing feature. Some economic expectations posted record increases this past year. Interest rate expectations improved dramatically, posting more than twice the improvement recorded in any prior year. Inflation expectations fell to their lowest level in four decades. Curtin notes that in nearly all post World War II downturns, increasing inflation and interest rates have accompanied rising pessimism (declining confidence) among consumers. These triggered sharp declines in consumer spending, and propelled the economy into "consumer-led recessions."

This was clearly not the case in 2001. The sharp falloff in business spending on plant and equipment drove the economy into the current recession. The Michigan survey revealed that consumers' primary fear was that business cutbacks would sour their job and income prospects. Consumers' reports of rising unemployment recorded the largest year-over-year increase since 1960. Curtin argues that since unemployment was very low in 2001 (at the outset) and rising unemployment affects a relatively small number of consumers, it was not surprising that consumer spending did not decline early in the recession.

In the November and December 2001 surveys, consumer concerns about rising unemployment diminished. In December, 48 percent of households still expected the unemployment rate to rise in the year ahead, but that proportion had fallen substantially from the 60 percent who expected rising unemployment back in September. Consumers were also quite optimistic about the financial prospects for the coming year. About 45 percent expected their financial situation to improve in the year ahead, up from 38 percent who thought so in the September survey. Just 7 percent expected their finances to worsen in the year ahead, only a bit higher than the all-time low recorded in January 2000.

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