ANN ARBOR—Consumer confidence plunged in October, falling to the lowest level recorded since 1993. “A wide range of factors contributed to the decline in consumer confidence, including a slowing economy, lower household wealth, and apprehensions about the possibility of war with Iraq,” according to Richard Curtin, the Director of the University of Michigan’s Surveys of Consumers. The October loss was the fifth consecutive monthly decline. “Unless the downward momentum is quickly halted, the accumulated loss in consumer confidence could tip the economy back into recession,” said Curtin. Unfortunately, as these apprehensions have heightened, consumers’ confidence in government economic policies fell to the lowest level since President Bush first entered office. “Without a renewed sense of confidence, consumers will act to curtail spending and increase their saving as a precaution against the possibility of adverse developments in their financial situation,” according to Curtin. Although the spending declines in 2003 are not anticipated to be large, they will be widespread as even sales of homes and vehicles will ease off this year’s pace despite the continuation of low interest rates. “Gains in business plant and equipment spending are needed to insure positive economic growth since consumer spending will not provide a cushion to protect the economy from a renewed downturn,” said Curtin. The Index of Consumer Sentiment was 80.6 in October 2002, down from 86.1 in September and 96.9 in May. The October decline was the fifth consecutive monthly decline, and the size of the October loss was only slightly larger than the average decline of 3¼ Index-points that has been recorded in each of the past five months.

The Index of Consumer Expectations, a closely watched forward-looking component of the Index of Leading Economic Indicators, was 73.1 in sustained, the declines in both indices have been large enough to be consistent with recessionary declines in spending. The financial and accounting scandals continue to have a large impact on the economic outlook. “Most consumers anticipate that the accounting scandals will diminish the willingness of business firms to invest in expansion and job creation,” Curtin noted. This view has led consumers to expect a slower pace of economic growth and a higher unemployment rate during the year ahead. More consumers reported that their financial situation had weakened in the October survey than at any other time during the past 10 years. “Rather than changes in incomes or prices, consumers more frequently cited declines in the value of their financial assets as the reason for the weakened financial situation. Indeed, more consumers mentioned declines in their wealth in the October 2002 survey than at any other time during the past 50 years,” according to Curtin. The holiday shopping season will be challenging for both consumers and retailers. “Consumer spending will depend on getting even larger discounts, and profits will depend on making even larger cost cuts. The financial situation and motives of both consumers and business favor continued disinflation,” Curtin concluded.

of Consumers