Post-War Boost in Consumer Confidence

Alan Greenspan was right. Consumer confidence (and spending) was depressed in the first quarter of this year by the mounting uncertainty about the outcome of the looming conflict in Iraq. Now, the University of Michigan's Survey Research Center reports that its Index of Consumer Sentiment exhibited the third largest one month gain in its 50-year history during April 2003. Consumer expectations began improving almost immediately after the start of the war.

While we welcome all signs of improvement, this year's rise in consumer confidence was only half the size of the gain experienced following the 1991 war in Iraq to liberate Kuwait. The April surge restored the index to its long-term average, but does not signal boom times ahead. Richard Curtin, director of the Survey Research Center, points out that the much bigger gain in early 1991 was completely reversed by the end of the year. "The reason for the 1991 reversal was a growing recognition among consumers that the slow pace of economic growth would produce a "jobless" recovery. The unemployment rate was 6.8% in March 1991 at the official end of the 1990-91 recession, and then continued to increase during the following fifteen months to a peak of 7.8% in June 1992, and remained above 7% for another twelve months." This sounds a little too familiar.

Curtin notes further that the same anxiety that consumers expressed about rising unemployment in 1991 were mirrored in the April 2003 survey. So, while this spring's boost in confidence has helped retail sales, Curtin predicts that it will not last through the fourth quarter unless consumers become more confidence about job prospects and expect wages to rise.

Sounding another cautionary note, Curtin cited the persistent pessimism of consumers regarding prospects for a comfortable retirement. This attitude is the fallout from the stock market declines in 2000-2002. The personal saving rate remains well below the historical level associated with household net worth, a condition that has persisted since the market declines began lowering household wealth three years ago. The latest consumer surveys suggest that household are well aware of the saving shortfall. Unless and until the equity markets recover to their pre-2000 levels, households will feel the pressure to save more to boost their net worth and protect their vision for retirement. This will continue to impose a drag, to some degree, on spending. The gains experienced by the equity market in recent weeks are encouraging on this point.