Confidence Data Are Puzzlement To Economists

After Saddam Hussein marched into Kuwait 13 months ago, U.S. consumer spending slowed to a trickle and the economy plunged headlong into recession. Since then, most bankers, economists, and business leaders have been scouring monthly data on consumer confidence for signs of an economic rebound.

When people feel better about global politics and the economic outlook, the data watchers argue, wallets will open and the country will spend itself out of recession.

But in recent months some of the economic gurus have become skeptical. They increasingly downplay the consumer confidence index, which gauges Joe Main Street's sentiments and expectations about the economy.

"I bundle it as one of many pieces of economic information in terms of where the economy is heading and where it has been," said Kenneth Keck, department executive for the bank card department at Harris Trust and Savings Bank in Chicago.

Bankruptcies Part of Picture

Like many bankers interviewed, Mr. Keck looks at a different set of figures to make his forecasts: employment and personal bankruptcy figures. He said he supplements these with data on disposable personal income as well as loan volume and delinquency rates at his bank.

"Obviously, psychology does affect what people do, how they spend money," said Carol A. Leisenring, chief economist at Corestates Financial Corp., Philadelphia. But the consumer confidence index "is not something I live and die for when it comes out every month."

Confidence Not Same as Reality

Nobody denies that consumers are more likely to buy if they feel better about the economy. But consumer confidence was falling before the Iraqi invasion, and has inched back only slightly since the war ended; so they are not certain that it tracks reality, Individuals may be too burdened with debt to make the traditional jump into spending.

"Confidence indexes are not reliable stand-alone indicators of durable goods purchases under ordinary circumstances," wrote C. Alan Garner in a recent article in the Federal Reserve Bank of Kansas City's Economic Review. Therefore, the senior Fed economist wrote, "confidence indexes should not be used as primary forecasting variables."

But compilers of the indices are not backing down.

Richard Curtin, director of the University of Michigan's consumer survey group, called his study "an effective tool" that gives advance warning about installment auto loan and home mortgage activity. The Michigan index of consumer expectations about the future of the economy is included in the Commerce Department's index of leading economic indicators.

Adds Fabian Linden, executive director of the New York-based Conference Board's monthly consumer survey: "The consumer confidence index has a very impressive record of foretelling business cycles."

Bankers, for their part, detect at least some link between consumer confidence measures and consumer activity.

Correlation with Loan Losses

"We saw a correlation between the radical drops in consumer confidence and the increase in loan losses," said Joseph Scharfenberger, president of Chase Manhattan's auto finance subsidiary in New Hyde Park, N.Y.

Consumer spending had already started to slow by August 1990, when Mr. Hussein moved into Kuwait. After the invasion, the Conference Board confidence index plummeted to 84.7 from 101.7 in the previous month. In January, when the U.S. officially entered the war, the index fell to a 10-year low.

While confidence rebounded when hostilities ended in March, it has inched down in recent months. At the end of August, it stood at 76.3.

The index is measured against a standard of 100 that was set in 1985.

Evanescent Trends

But the data, as with most economic indicators, are evasive. Buck Harnage, executive vice president of consumer credit at Barnett Banks Inc. in Florida, said he has seen "a direct correlation" between the consumer confidence index and spending in some of the bank's markets and none in others.

Mr. Garner of the Kansas City Fed concludes that consumer confidence indices are most helpful in extraordinary circumstances, such as the Persian Gulf War, "where confidence changes abruptly because of unanticipated noneconomic events."

Bankers, meanwhile, are still waiting for people to be economically and psychologically ready to make purchases. There has been no surge in consumer spending since the war ended, despite flickering signs of an improvement in the economy.

Until unemployment rolls level off and personal debt agregates are reduced, bankers say, no gain in consumer confidence - however big or small - will translate into consumer spending.

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