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April 12, 2001

Consumer Fears Will Delay Recovery

Common sense tells us that the most important factor in consumer confidence levels is the employment situation. Generally, when Americans' job security is at risk they are much more concerned about spending than when they are losing money in the stock market.

But consumer sentiment is more closely tied to the stock market now more than ever before. More consumers these days are also investors, and when the stock market plunges, so does consumer confidence. Combine this with an increasing number of layoffs, and consumers will continue to become more pessimistic.

And, consumer confidence levels have become a good indication of future stock market performance. Usually, if consumer sentiment makes a firm recovery, it's a sign that the stock market will begin the recovery process in about six months. That's because consumer spending accounts for approximately two-thirds of all spending in the economy. If consumer confidence is up, spending is up -- and that's good news for the economy. But if consumer confidence is down and spending drops -- the economy is going to find it harder to pull out of the doldrums.

That's where we are right now. Consumer confidence levels, despite a slight bounce last month, have fallen to a seven-year low. And that means the recession will likely drag on longer than most people expect.

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