Economists React: Declining Confidence Presages Heavy Shoe to Drop

June 24th, 2008 | Wall Street Journal

Economists and others weigh in on the tumble in the Conference Board’s measure of consumer sentiment.

This is incredibly awful. Even as some people spend their tax rebates — Redbook chain store sales growth hit a nine-month high last week — the majority appear to be overwhelmed by the surge in gasoline and food prices, and the drop in stock and home prices. Talk of higher rates probably isn’t helping either. The drop in the headline reflects sharp declines in both current conditions, down to 64.5 from 74.2, and expectations, down to 41.0 from 47.3. The latter is the lowest since the survey began in 1967 and is consistent with consumption falling at a 3% year-to-year rate. The worst quarter ever was -1.5% in the fourth quarter of 1974. This is what’s coming when the rebates are spent. –Ian Shepherdson, High Frequency Economics

Consumer assessments of the economy deteriorated even further in June, to its lowest level since early 1992. Households are much more pessimistic about the future than they are about the present. Nevertheless, assessments of current conditions have fallen very sharply in the last several months. If confidence stays at this level or moves even lower, real consumer spending and economic growth will slow even more, perhaps sharply. –Steven A. Wood, Insight Economics

Much weaker than expected report, with confidence plunging eight points to 50.4, low since February 1992 and one of the lowest readings ever. Expectations plummeted to an all-time low. The current conditions index plunged another 10 points for a 50-point collapse in the past five months. Views of the job market and the overall economy continued to badly deteriorate Expectations for job growth, the overall economy, and income growth all worsened significantly further. Consumer expectations are considered a leading economic indicator. –Ted Wieseman , Morgan Stanley

The total index has fallen 26 points in 4 months, one of the most severe drops in history. The only times it has been exceeded was in the original OPEC crisis’s in 1973 and 1980 and in the Gulf war in 1991. In all of those episodes oil prices surged. The total index is now less than half its level from one year ago. The plunge in confidence is occurring at the same time most consumers are receiving their tax rebate checks and some are spending them. However, what ever joy tax rebates have brought to recipients was overwhelmed by the steady rise in oil and gasoline prices in the past few months. –Brian Fabbri, BNP Paribas

Consumer attitudes are nearly as bad as they have ever been. Yet, household spending has continued to advance. Retail sales for May were better than expected and the weekly chain store sales reports suggest that the pace of spending has held up reasonably well in June (despite record high gasoline prices), no doubt reflecting the boost from fiscal stimulus checks. Still, outlays in March and April (before the government funds were distributed) proved surprisingly resilient, perhaps suggesting more fundamental strength than would have been expected given the substantial headwinds that households face. –Michelle Girard, RBS Greenwich Capital

Ongoing downward pressure on housing prices and equity markets is operating to pound household net worth lower in the second quarter of 2008 — and that follows right on the heels of a massive $1.7 trillion haircut to household net worth in the first quarter of 2008. Compounding the huge and rapid deterioration of household net worth, there continues to be relatively weak employment market conditions, and persistent upward pressure on crude oil, fuel and gasoline prices These very low readings for consumer sentiment are generating a distinct impression that there is another heavy shoe to drop with respect to consumer spending momentum in the second half of 2008. –Brian Bethune, Global Insight

Compiled by Phil Izzo

Offer your reactions in the comments section.

Dig into an interactive summary of economists’ forecasts for the coming year from the latest WSJ.com survey.