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December 22, 2000

Americans' Optimism Fades To a Grinch-Like Gloom As Sales Slow, Stocks Slip
By Steve Liesman, The Wall Street Journal

Chance of Rain: 100% ... Weiss comments

NEW YORK - Is the era of irrational exuberance over?

Earlier this month, the University of Michigan Survey of Consumers posted the fourth-largest drop in its history. An NBC/Wall Street Journal survey found that 43% of Americans now believe there will be a recession in the next 12 months, a sharp 17 percentage-point jump in two months.

What has been so surprising is the speed with which the nation replaced Pollyanna with Dr. Doom. Only war (Iraq's August 1990 invasion of Kuwait) and recession (in 1980) precipitated bigger drops in the Michigan survey.

What is bothering America? And are people right to be bothered?

The fight over the presidential elections and the coming change in administrations and policies appear to have provoked fear and uncertainty. Higher energy prices and debt levels, economists suggest, also began to weigh on consumers' moods. And the plunge in the Nasdaq Stock Market, which has become the mascot of the New Economy, signaled to many the end of the seemingly unending party.

Whether the confidence gauges are harbingers of recession is a complicated subject. Jason Bram, an economist for the Federal Reserve Bank of New York who has studied the indexes, says not every decline in consumer confidence is followed by a recession. But when there is a recession, it is typically preceded by a decline in consumer confidence. Put another way, it doesn't rain every time it gets cloudy, but it gets cloudy every time it rains.

One thing is for sure: The nation can lose confidence quickly -- and it can take a long time to rebound. For example, the Michigan index lost 30 points in just five months beginning in April 1990, but it took almost three years to recapture the loss.

The era of irrational exuberance is definitely over. If the Nasdaq's 50% plunge in recent weeks didn't already tip you off, the numerous reports of a dismal holiday shopping season and rounds of lay-offs certainly will.

It is not surprising that consumer confidence levels plunged sharply this month. And, it won't be surprising when it drops even more in the coming months. The reality is that the stock market, though it may stabilize somewhat over the next few weeks, still has a long way to fall before reaching reasonable valuations. Just take a look at companies such as Xerox, Lucent, and AT&T;, which have repeatedly disappointed investors despite lowering earnings estimates every quarter. And, given the slowdown in the economy, there is no reason to think company earnings will recover next quarter -- or even next year.

Aside from the stock market, other factors have crippled consumer confidence. Inflation, in the form of higher heating oil, natural gas, and fuel prices have cut into consumer spending. Plus there are the mounting credit card bills from when "irrational exuberance" was still in vogue -- credit card debt is up 10% over this time last year.

So, despite a low unemployment rate and higher personal income, consumers won't be lured back into the stores anytime soon. They're too smart to go out as storm clouds gather over America's economy.

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