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Consumers have become increasingly convinced that the accounting and financial scandals will slow the pace of economic growth and as a result have adopted a more cautious outlook."Consumers thought that the accounting and financial scandals will influence their economic situation in two ways.

First, it will lower the willingness of business firms to invest in expansion and job creation, resulting in less favorable job and income prospects. Second, the decline in stock prices will require consumers to save more out of their current income if they are to achieve their retirement goals," according to Richard Curtin, the Director of the University of Michigan’s Surveys of Consumers. Weaker consumer confidence will slow the pace of spending growth, but not cause outright declines in overall expenditures. "The outlook is for slower but still positive growth in consumer spending as consumers shift their emphasis toward increasing their savings as a precautionary measure and to help meet their retirement goals," according to Curtin. The Index of Consumer Sentiment fell to 88.1 in the July 2002 survey, the lowest level recorded in six months. The Sentiment Index declined by nearly 5% in each of the past two months, falling from 96.9 in May and 92.4 in June. The Index of Consumer Expectations, a closely watched component of the Index of Leading Economic Indicators, was 81.0 in July, down from 87.9 in June and 92.7 in May. The two-month decline of nearly 13% reduced the Expectations Index to its lowest level since last November. Despite the recent declines, both indexes remained above the levels consistent with sparking absolute declines in consumer spending. While slower economic growth and higher unemployment were anticipated by all consumers, these concerns were especially acute among consumers that mentioned stock price declines when asked to identify recent important economic developments. "One-third of all consumers cited some aspect of the accounting and financial scandals in July, more than three times the level recorded in June," according to Curtin. While these consumers held more negative views on the economy and employment prospects, they were also more likely to expect declines in interest rates. Indeed, vehicle and home buying attitudes improved due to lower interest rates. However, the burden of the slowdown in spending will fall disproportionately on purchases that are not interest sensitive. The most pervasive and lasting impact from the decline in stock prices will be to increase the importance of saving. "Consumers gave the most negative assessment of their chances of achieving a comfortable retirement in the past five years," said Curtin. Although the 1987 stock market crash had a minor and short-lived impact on consumer confidence, it sparked an increase in the personal savings rate of 1.4 percentage points over the following eighteen months. "Even after job and income prospects rebound, it is still likely that consumers will continue to increase their savings. This will result in a correspondingly slower rate of growth in consumer spending over the next year or so," according to Curtin. RELATED LINKS:

Surveys of Consumers >> University of Michigan Institute for Social Research >>