Consumers Are Becoming More Pessimistic

Consumers grew increasingly alarmed about declines in their current financial condition during April. Increasing pessimism among upper income households (those with incomes over $50,000 per year) is dragging down various indices of consumer confidence. The University of Michigan's Index of Consumer Sentiment fell during April to 87.8, down from 91.5 in March, and the lowest monthly reading in five years. Separately, the Conference Board's Consumer Confidence Index also declined in April, dragged down by a more negative view of current economic conditions.

The assessment of current conditions by upper income households has been worsening since the beginning of the year. These households are keenly aware of the hit their personal and retirement portfolios have taken from falling stock prices. Although all households have been downgrading their assessments of their current financial situations, those views by upper income households have worsened twice as fast as for lower income households. About one-third of upper income households reported that their personal finances have worsened. Negativism has crept into buying attitudes for vehicles, and durable goods. Vehicle buying attitudes weakened sharply in early April, falling from near a 12-month high in March to the lowest level in the past year. Fewer price discounts were reported, and consumers began expressing uncertainty regarding their future incomes. Neither of these bode well for auto sales in the coming months. More bad news: favorable attitudes toward purchases of furniture, appliance and home electronics fell to their lowest level in 8 years in April due to concerns about future jobs and incomes.

The growing concern about job prospects is particularly troubling. The majority of consumers expect the unemployment rate to rise during the year ahead. The director of the Michigan survey, Richard Curtin, notes that while the level of confidence is "still inconsistent with a full-fledged recession, the April loss indicates that a significant rebound in the second half of the year is now less likely." If unemployment heads up toward 5%, which is relatively low by historical standards, consumers will judge it by the even lower 4% to which they've become accustomed over the past 2 years, fueling fears of further job cuts. Curtin says "given that the unemployment rate is not expected to retreat back to 4% even by the end of 2002, persistent apprehensions about job and income prospects are likely to provoke a prolonged period of slow growth."

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