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E-Journal 5

Below is one of many articles on falling consumer confidence. In the AD/SRAS model, how would you show the impact of falling consumer confidence? How would you show it in the aggregate expenditures model? What are the various commentators arguing about?

Post your e-journal response to All Public Folders - Academic Departments - Economics - Rittenberg - EC152-01 - E-journal 5 by midnight and be prepared to discuss in class.

February 28, 2001, Wednesday 2 STAR EDITION

SECTION: BUSINESS; Pg. 1

LENGTH: 593 words

HEADLINE: Confidence drops to four-year low;
2 bleak reports add to pessimism

SOURCE: Houston Chronicle News Services

DATELINE: NEW YORK

BODY:
NEW YORK - Mounting worries about jobs and the business climate dragged consumer confidence in February to its lowest level in more than four years, and that pessimism was reinforced by bleak reports on factory orders and home buying Tuesday.

The Conference Board said its Consumer Confidence Index dropped to 106.8, down from 115.7 in January. It marked the fifth consecutive drop in the monthly index, which fell to its lowest point since June 1996.

"Consumers are seeing all the layoff news, they're hearing all the doom and gloom comments, and they've gotten worried, there's no question about it," said Joel Naroff of Naroff Economic Advisors in Holland, Pa.

Orders for big-ticket manufactured goods plunged in January to their lowest level in 19 months, the Commerce Department said. Meanwhile, new-home sales fell 10.9 percent in January, the biggest drop in seven years.

For now, the economy continues to walk a tightrope, avoiding a plunge into recession, said Lynn Franco, director of the Conference Board's Consumer Research Center.

"The erosion in consumer confidence continues to be fueled by weakening expectations regarding business and employment conditions," Franco said. "While the short-term outlook continues to signal a severe economic downturn, consumers' appraisal of current economic conditions suggests we are still undergoing moderate economic growth and not a recession."

The Conference Board index, based on a monthly survey of some 5,000 U.S. households, is considered a key indicator because consumer spending accounts for about two-thirds of the nation's economic activity. The index compares results to its base year, 1985, when it stood at 100.

The overall February confidence figure was lower than the reading of 110.5 that had been expected by analysts.

Still, one economist noted that some figures contained within the Conference Board's report indicate less dire concerns on the part of many consumers.

"Generally, it's a weak number on the headline, but the details show a little more encouragement," said Gary Thayer, chief economist for A.G. Edwards & Sons in St. Louis.

Thayer pointed to figures in the Conference Board's report showing a growing number of people believe the economy is exhibiting normal conditions, as well as figures indicating more consumers plan to buy new homes and cars in the next six months.

The new report comes amid intense speculation about whether the Federal Reserve policy-makers will cut interest rates again before their next meeting, March 20. But Thayer and Naroff said they don't believe the drop in confidence will be enough to push the Fed into taking early action.

The stock market moved lower in reaction to the reports as well as continued pessimism over the economy.

Consumers continue to be pessimistic about the outlook over the next six months, the Conference Board said. The percentage of consumers expecting a pickup in business conditions declined from 13.1 percent to 11.1 percent, while those anticipating conditions to worsen increased from 15.2 percent to 17.8 percent.

In addition, only 10.2 percent of American consumers expect more jobs to become available, down from 11.7 percent last month. Those expecting fewer jobs to become available increased from 21.5 percent to 27.2 percent.

But 57.9 percent of consumers believe the current economy is exhibiting normal conditions, up from 54.8 percent last month. The numbers of people with plans to buy new homes and cars in the next six months also increased, the Conference Board reported.

TYPE: -LINKS-

LOAD-DATE: March 2, 2001