Shaken by the Persian Gulf crisis and fears that higher oil prices will push a sluggish economy into a full-blown recession, consumer faith in the economy has fallen to its lowest level since the early 1980s, according to two leading surveys due out this week.
Consumer confidence has been dropping steadily since the beginning of the year. But this month, on news of a possible war in the Middle East, it dropped to its lowest level in seven years, according to the Conference Board, a prominent business and economic group whose survey will be released today. The August decline was even sharper than the drop following the 1987 stock market crash.
A survey by the University of Michigan is expected to show similar results when it is released later this week.
The monthly surveys are watched closely by economists and Wall Street because of the key role that consumer psychology plays in keeping the economy going. If consumers lose confidence in the economy, they are more apt to delay big purchases of such items as cars or houses, even if their own personal income has not changed. A large drop in consumer confidence, analysts say, could itself tip the country into recession.
"Consumers haven't created the downturn," said Richard Berner, an economist at the investment banking firm of Salomon Brothers Inc. in New York. "But they will make it worse or provide the final straw that causes a recession. I myself believe we are headed for a mild recession."
Reports from the Commerce Department yesterday are likely to continue the debate about whether the economy is headed into recession. U.S. personal income rose 0.6 percent in July, following a revised 0.5 percent increase in June. Growth in personal consumption, on the other hand, slowed last month -- to 0.5 percent -- after a 1.0 percent gain in June.
Fluctuations in these numbers over the next several months could be key in determining how far and how fast the economy might slide.
In the Conference Board survey, the group based its findings on a survey of 5,000 households throughout the country. It used 1985 as a base for comparison by setting the index at 100 for that year.
At the end of 1989, the index was 113, meaning that confidence was 13 points higher than it was in 1985. The index drifted downward to 102.4 by June and to 101.7 in July. In August, the confidence index had fallen to 83.3, down about 18 points from July and barely 3 points above the index level of 80 that Conference Board economists believe would signal a full-scale recession-level worry by consumers.
The sharpness of the August drop is largely tied to news from the Persian Gulf, economists working on the two surveys said. But even without the political unrest, pessimism about the economy that has been building all year would likely have continued in August, they said.
"There's the savings and loan crisis looming over us, you have virtually no employment growth and you have a number of states as well as the federal government grappling with budget problems," said Jason Bram, an economist with the Conference Board. "And there's the possibility of higher taxes."
The rapid escalation in oil prices is particularly alarming to consumers because it immediately affects daily living expenses like gasoline and heating prices. Increased costs cut into the amount of money left over to spend on big-ticket items like refrigerators or automobiles, analysts say.
Although consumer confidence plunged after the stock market crash in October 1987, it rebounded somewhat because buyers believed the underlying economy was strong.
The current economic climate ismuch different, according to some analysts. Today, said Steven Einhorn of Goldman Sachs & Co. in New York, fears of underlying weakness in the economy have grown for weeks, thanks to "uninspiring profits, sticky interest rates, stubborn inflation, a slowly growing economy and a tortuous budget." With all that threatening to sour the outlook, he said, "Consumer confidence now becomes the key to whether the U.S. economy will enter a recession."
Lincoln Anderson, an economist at Bear Stearns & Co., is somewhat encouraged by the prospect that there may be a slowdown in buying.
"It's not clear that a slowdown in consumer spending now isn't a good idea," he said. "I think consumers are quite capable of anticipating a trend in the economy and adjusting accordingly."
The old-fashioned view, called "the paradox of savings," is that attempts by consumers to boost savings slows the economy and that eventually slows down income gains, which in turn forces consumers to save less. "That's the old-guard view," Anderson said. As long as consumers don't overreact and curtail spending too much, he said, "I just don't subscribe to it."
So far, the consumer confidence surveys don't suggest that consumer pessimism will cause too abrupt of a reduction in buying.
Among people surveyed by the Conference Board, 7.5 percent said they plan to buy a car within the next six months, down from 8.8 percent in July. Fewer people said they would buy a house -- 3.1 percent compared with 4.3 percent in July -- but the decline was only slightly lower than a year ago.
"Business is soft," said Neil Sanders, manager of the Reliable Home Appliances store in downtown Washington. "But if they keep talking about it enough, consumers will buy the idea of a slowdown. If you say the sky is falling enough, it will."