February 20, 2001

Consumer-Sentiment Index Plunges
By Greg Ip and Russell Gold, The Wall Street Journal

The Fear Before the Storm ... Weiss comments

WASHINGTON - What the economy has to fear most, it seems, is fear itself.

Reports Friday that housing starts and manufacturing output excluding autos both rose in January confirmed that the economy rebounded a bit last month after plunging in December -- as a cautiously optimistic Federal Reserve Chairman Alan Greenspan indicated to Congress earlier in the week.

But the big question going forward is whether January was the beginning of a true turnaround or just a pause before a February collapse. The pessimistic scenario gained weight as consumers' moods continued to darken in the first half of this month. The University of Michigan reported Friday that its index of consumer sentiment plunged to 87.8 in early February, its lowest level since 1993, from 94.7 in January. Low confidence could prompt consumers to cut spending enough to transform the fear of a recession into reality.

"The announcements of layoffs are having a pronounced negative effect on consumer confidence," said Joseph Abate, a senior economist at Lehman Brothers. Though "the fundamentals are weakening, I don't think their current level ... justifies the pronounced fear that people have regarding layoffs."

In fact, the gap between consumers' assessment of current conditions and their much more pessimistic expectations of the future is "the widest ever measured," Merrill Lynch noted. "So if their worst fears are not realized, the sentiment index should bounce back." (The University of Michigan's index of consumer sentiment is different from its index of customer satisfaction.)

Consumers are afraid all right -- just like anyone would be afraid when they see a horrific storm bearing down on them. This time, the storm is economic, a whirlwind of financial misfortune that is bearing down on America with all the fury and certainty of a full-blown hurricane.

The bump in housing starts and timid rise in manufacturing are like the calm moments before a storm. They can't make up for the fact that a mile-high cloud of darkness is moving ever closer. And with a category 4 recession bearing down on the U.S., consumers are battening down the hatches.

Fear of layoffs, increased conflict with Iraq and a return of high oil prices, a sudden lunge upward in inflation, and stock market havoc are all factors affecting consumers' fears for the future. But it's not just panic-driven paranoia, all of these factors are real concerns -- all of these things could happen or are happening at present. And though the gap between current economic conditions and future expectations is certainly wide, the fact is that current fear is what motivates future conditions.

Even Alan Greenspan admitted in his last address to Congress that consumer confidence plays a huge role in whether or not the economy avoids recession. Right now, consumer confidence is plunging, helping to feed the economic maelstrom that is about to hit. Hang onto your hats, folks. This is going to be the storm of the century.

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