ANN ARBOR— Confidence declined in January as consumers expressed greater concerns about their future financial prospects. "Consumers thought that the 4th quarter slowdown in economic growth would persist in the months ahead. As a result, consumers expected smaller wage gains and thought that jobs would remain scarce," according to Richard Curtin, the Director of the University of Michigan’s Surveys of Consumers. The potential war with Iraq is now an important source of economic uncertainty. "While a war with Iraq is not the only source of concern, it is likely that in the months ahead the war will dominate changes in consumer confidence," noted Curtin. Consumers will become more apprehensive about the economic impact of the war and the potential for domestic terrorism as the start of the war nears, and the subsequent rebound in confidence could be as dramatic as what followed the quick and decisive victory against Iraq in 1991. "Unfortunately, consumer confidence fell again in late 1991 as consumers complained about a jobless recovery and what they considered to be ineffective economic policies. The same may happen in 2003," said Curtin. The recently announced tax cuts did not prompt consumers to adopt more favorable financial expectations. "Confidence in government economic policies is now at its lowest level since President Bush first took office, with more consumers judging Bush’s economic policies unfavorably than favorably in the January survey," according to Curtin. Overall, the data indicate a slower pace of spending during 2003 as consumers must again cope with the diminished prospects from a jobless recovery that is now widely anticipated. The Index of Consumer Sentiment was 82.4 in January 2003, down from 86.7 in All of the January decline was in the Index of Consumer Expectations, a closely watched component of the Index of Leading Economic Indicators, which fell to its lowest level since the recession in the early 1990s. The Expectations Index was 72.8 in January 2003, down from 80.8 in well above the 1990 low of 50.9. The primary concern of consumers was their diminished prospects for renewed growth in jobs and wages. "While consumers expect the economy to stagger forward, they think the pace of growth will be too slow to keep the unemployment rate from rising," according to Curtin. On the positive side, consumers expect the inflation rate to remain low and do not think that rising oil prices will spark a sustained burst in overall inflation. "Consumers have shown no inclination to ease their demands for deep discounts when shopping, and their insistence will continue to foster deflation in the prices of manufactured goods," noted Curtin. Consumers more frequently reported that the economy had weakened at the end of 2002, and they more frequently expected the pace of economic growth to remain at that slower pace in the months ahead. Most of the concerns of consumers about the lagging prospects for growth were focused on the labor market, as consumers expected little investment in expansion and job creation by business. Jobs were expected to remain scarce, as overall job prospects have remained unchanged at low levels for the past six months.

University of Michigan Institute for Social Research

Survey of consumers