Consumers Growing More Upbeat

  • by January 21, 2002
Consumers felt the most upbeat in a year in January as growing hopes for a swift recovery from recession overshadowed worries about joblessness, a key index of consumer sentiment showed Friday.

The University of Michigan's closely watched index surged for a fourth straight month to 94.2 in early January from 88.8 in December, handily beating consensus forecasts. The index hit its highest level since January 2001 and is up more than 12 points from a post-Sept. 11 low.

Analysts said the report was the latest confirmation that consumers, aided by 4.75 percentage points of Federal Reserve interest rate cuts in a year, have withstood the worst of the current downturn and are feeling better about the future.

"The reason the mood is changing is partly in response to the Fed's aggressive action, which is supporting optimism. And people can see the economy seems to be doing a lot better than many people feared," said James Glassman, senior economist at J.P. Morgan Chase.

Economists track consumer sentiment because it can often give clues on future spending, the linchpin of the economy. Recent data on retail sales, while sluggish, have beaten lowered expectations, stirring confidence that Americans will not pull back on their spending habits. The sudden rise in sentiment could mean consumers are feeling a bit better about the labor markets, analysts said. Recent reports on weekly jobless claims have offered hope that the harsh pace of layoffs since Sept. 11 may be abating.

"This may also be reflecting an underlying reality that the job market is improving, too. We're certainly seeing better numbers on the initial unemployment claims," said Bill Cheney, chief economist at John Hancock Financial Services.

Analysts cautioned, however, that the unexpectedly strong lift in consumer sentiment did not necessarily foretell a similar rise in spending.

Indeed, in a sign that consumers' personal finances remained under pressure from recession, the current conditions index edged down to 98.1 in January from 99.0.

But the strong rise in sentiment did lower risks Americans would be more cautious opening their wallets in coming months — a worry espoused by Federal Reserve officials who have said one of the greatest risks to a potential recovery is a sudden pullback in consumer spending.

"The big risk going forward that Alan Greenspan has articulated ... is that consumer spending would slow down, that consumers' mood would darken. And this at least suggests that that is not so likely," Cheney said.

Meanwhile, hopes abound for the future. The expectations index, which tracks consumer attitudes about the year ahead, roared up to 91.7 in January from 82.3 in December.

"It suggests quite a bit more optimism," said Peter Buchanan, economist at CIBC World Markets. "As always, of course, it depends on whether this improvement in sentiment translates into more ringing of the cash registers, and we'll have to look at the upcoming sales numbers for that."

The preliminary consumer sentiment survey is based on telephone interviews with roughly 250 Americans across the country on personal finances, business conditions and buying conditions. It is revised with a total of 500 interviews at the end of the month.

- (Reuters)

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