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Consumer confidence makes a comeback

The end of fighting in Iraq has helped Americans feel better about the economy.

By Compiled from Times wires
© St. Petersburg Times
published April 30, 2003

Consumers' confidence in the U.S. economy this month jumped the most in 12 years as the fighting in Iraq ended, energy costs fell and stock prices rose.

The Consumer Confidence Index, which had declined for four consecutive months, rose to 81.0 from a revised 61.4 in March, the Conference Board said Tuesday. The increase was far better than the reading of 70 that analysts had expected.

"The swift outcome in the Middle East has helped quell consumers' short-term concerns," said Lynn Franco, director of The Conference Board's Consumer Research Center.

Economists closely track consumer confidence because consumer spending accounts for two-thirds of U.S. economic activity, and consumer spending has propped up the economy since the country dipped into recession in 2001.

The Conference Board's index is derived from responses received through April 22 - as the war in Iraq was making successful strides - to a survey mailed April 1 to 5,000 households in a consumer research panel.

Rudolf Thunberg, an economist at Reid Thunberg & Co. whose forecast of 80 was the highest in the survey, said he doubts sentiment will keep rising. The example after the previous war with Iraq shows that "the postwar euphoria tends to fade and the weak labor market is likely to keep consumers cautious," he said. About a half-million jobs were lost in the last two months.

After the end of a recession in March 1991, a period dubbed the jobless recovery, the postwar rise in confidence proved short-lived and the index slumped to a low of 47.3 by February 1992.

"Confidence matters but jobs matter more," said Oscar Gonzalez, an economist at John Hancock Financial Services.

The index rose 21.7 points to 81.1 with the defeat of Iraq in March 1991. The surge this month was driven by increases in both expectations and consumers' assessments of present conditions.

There's "a very significant difference" between then and now, said Delos Smith, a Conference Board economist. After the Gulf War in 1991, "the present situation didn't move; it was all expectations," Smith said. Now, "we're in much better overall shape."

This post-war surge differs in that both components of the index - the expectations index and the present situation index - posted gains.

The Expectations Index rose to 84.8 from 61.4. The Present Situation Index improved to 75.3 from 61.4.

"The increase in the Present Situation Index, especially in labor market conditions, may very well signal a turnaround in confidence and a more favorable outlook for consumer spending," Franco said.

Consumers' assessment of current conditions was less negative than in March. Those rating present business conditions as "bad" declined to 23.7 percent from 30.0 percent, while those holding the opposite view rose to 16.2 percent from 13.6 percent. Labor market conditions also improved. Consumers reporting that jobs are hard to get declined to 29.5 percent from 32.3 percent, while those claiming jobs are plentiful edged up to 13.0 percent from 11.4 percent.

Consumers' short-term expectations improved as well. Those anticipating an improvement in business conditions over the next six months rose to 18.7 percent from 13.0 percent. Consumers anticipating conditions to worsen dropped to 12.3 percent from 20.0 percent.

The employment outlook was rosier as well. Consumers expecting more jobs to become available increased to 16.7 percent from 10.8 percent, while those expecting fewer jobs fell to 20.9 percent from 26.5 percent. The proportion of consumers anticipating an increase in their incomes rose to 17.1 percent, from 15.8 percent.

A fall in oil prices and a rally in stocks may be helping to underpin expectations. In the last two months, crude oil prices have fallen by a third since reaching a 12-year high of $39.99 a barrel on Feb. 27 in the build up to the war. Since reaching a five-month low on March 11, the Standard & Poor's Index of 500 stocks is up 14 percent.

- Information from the Associated Press and Bloomberg News was used in this report.

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