March 03 , 2003

Prospect for war and the economy:
two sources of consumer uncertainty

ANN ARBOR, Mich.—Consumer confidence declined in February due to growing apprehensions about the prospects of war with Iraq as well as the possibility of domestic terrorism. “Consumers anticipated that the pace of economic growth will slow in the months ahead, but most consumers expect a quick resolution to the war, and thus expect only a temporary impact on the overall economy,” according to Richard Curtin, the director of the University of Michigan's Surveys of Consumers.

More importantly, consumers continued to voice other reasons for their concerns about job and income prospects that will remain even after the war is won. “While the spending rate can be expected to improve in the
second half of 2003, the pace of gains will remain sluggish as consumers expect a slow and uneven rebound in jobs and incomes and report a greater desire to repay debts and rebuild their savings and reserve funds,” Curtin said.

The data provide no evidence of a recent steep plunge in confidence and provide no reason to anticipate sharp declines in consumer spending. “The downside risks are substantial, however, given that consumers’ anxiety is quite high and a domestic terrorist attack could have an immediate and large impact on spending,” Curtin said.

The Index of Consumer Sentiment was 79.9 in February 2003, down from 82.4 in January, and 90.7 in February 2002. The February decline was reflected in less favorable evaluations of current conditions as well as less favorable future expectations. The Current Conditions Index fell to 95.4 in February from 97.2 in January largely due to smaller income gains as well as higher prices for home heating and gasoline. The Index of Consumer Expectations, a closely watched component of the Index of Leading Economic Indicators, fell to 69.9 in February 2003, down from 72.8 in January, and 87.2 in February 2002.

Slower income growth and higher prices for home heating and gasoline have hurt the financial situation of consumers. “Nearly as many consumers reported that their overall financial situation had worsened as had improved in the February survey,” according to Curtin. While higher energy prices were frequently mentioned, most consumers did not expect that they would remain high for long. “Overall, consumers anticipated only a minor increase from last month in the overall rate of inflation, with consumers now expecting an overall inflation rate of 2.7 percent during the year ahead,” Curtin added.

While consumers judged prospects for the economy during the months ahead much less favorably due to the impending war, most other expectations did not show similar declines. “When the near term outlook has been as bleak as now, the overall level of the Sentiment Index has typically been about 20 percent lower,” according to Curtin.
This indicates both the large impact of the war as well as how temporary the impact is expected to be.

Overall, the Sentiment Index is now about halfway between its all-time peak of 112.0 and its all-time low of 51.7. “Such a middling level is high enough to avoid a recessionary downturn but not strong enough to insure robust economic growth. Nonetheless, its middling level is sufficient to promote widespread uncertainty,” Curtin said.

Contact: Richard T. Curtin, Director Surveys of Consumers
Phone: (734) 763-5224


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