Consumer Sentiment Hits New Low

The University of Michigan's preliminary index of consumer sentiment in late October fell to 80.6, its lowest level in 10 years, down from 86.1 in September and 87.6 in August. In his monthly report, the Director of Michigan's Surveys of Consumers, Richard Curtin, noted that a combination of factors were responsible for the slide, including a slowing economy, lower household wealth and saber-rattling talk of an impending war with Iraq. All of this seems to have finally worn down the consumer resilience that has been the hallmark of the past two years.

The survey gauges consumers' separate assessments of the economy and their own personal financial situation. Pessimism was greatest regarding the economic outlook. There is no question that the news media exerts an influence over consumer expectations. Two-thirds of all consumers reported hearing of recent changes in economic conditions, with nearly everyone reporting some type of negative development. The most frequently mentioned issues were the accounting and financial scandals that have rocked major U.S. corporations, declines in stock prices, and job losses. Overall, 57% of consumers in October expected bad times for the economy in the year ahead, up from 42% in September and just 32% in early summer. Underlying a significant change in buying attitudes is the expectation by nearly half of all consumers in October that unemployment will rise in the year ahead.

Regarding their own personal finances, the declines in stock prices seem to have finally registered hard with consumers. Consumers in October who thought their financial situation had weakened over the past year outnumbered those who felt it had improved. This was the worst assessment by consumers of their current financial situation in ten years. Indeed, Curtin noted that "more consumers mentioned declines in their wealth in the October survey than at any other time during the past fifty years." Remarkably, consumers were not more pessimistic regarding their financial prospects for the year ahead, mostly because they expected inflation to remain low (another sign of expected weakness in the broad economy).

As a consequence of this gloom, buying attitudes toward homes, vehicles and household durables fell slightly in October, although they remained at levels considered "favorable." In contrast, buying attitudes toward furniture, appliances, home electronics and other household durables retreated to levels seen a year ago.

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