Recent surveys make clear that consumers are plenty worried about the future. And why not? They're reading about widespread company layoffs while watching their stock-laden retirement-savings and college funds shrivel.
"Never before have so many households been invested in the stock market," says Sophia Koropeckyj, a senior economist with Economy.com. "It used to be just the concern of wealthy people."
At the same time, paychecks are showing a nice bump-up, jobs are plentiful and sales of cars and homes have held up surprisingly well. Consumers' confidence in the current situation — for both themselves and the economy — has dipped only a little compared with the drop in their outlook for the future.
"It's the biggest gap we've ever seen," says Christopher Carroll, a professor of economics at Johns Hopkins University who has researched the relationship between consumer sentiment and spending.
Taken together, the softening in consumers' current assessment and the plunge in their expectations doesn't paint an encouraging picture. Never in the past 30 years has the index of consumer confidence fallen by as much as it has recently without being followed by a recession.
But wait. Among the 53 so-called blue-chip economic forecasters, the most optimistic projection for 2001 — a growth rate for the economy of 3.4 percent — belongs to none other than the Conference Board, which produces one of the two main indexes of consumer confidence.
Perhaps researchers there are taking into account that the recent drop in confidence is from extraordinarily high levels. Although the odds of a recession this year are still low, nervous consumers could become the trigger.
"I think we can talk ourselves into a recession if we're not careful," says Carroll.
Many analysts believe that's what happened in 1990, when the evening news bombarded us with dire predictions about high oil prices. A more likely outcome is that lower interest rates and the accompanying surge in mortgage refinancing will help soothe consumer anxiety about the stock market, says A.G. Edwards chief economist Gary Thayer.
To determine whether interest rates need to be cut further, the Federal Reserve Board will try to gauge the state of mind of consumers — no mean feat.
"Our economic models have never been particularly successful in capturing a process driven in large part by nonrational behavior," Fed chairman Alan Greenspan told the Senate banking committee in February. "This unpredictable rending of confidence is one reason that recessions are so difficult to forecast.