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US consumer confidence shaken by economic slowdown

The dramatic US economic slowdown has sent consumer confidence in January to its lowest level in more than four years while worries about job security soured optimism about the future, a report on Tuesday showed.

The Conference Board said its monthly index of consumer confidence slid from 128.6 in December to 114.4 in January, the sharpest one-month drop since October 1990 when the country was mired in recession. Economists had predicted a dip to 124.2.

The expectations index, which measures the outlook for the next six months, fell from 96.9 in December to 77.0 -- its lowest level since October 1993 and a warning sign that American consumers may soon tighten their belts another notch.

"Consumers' increasing pessimism about the short-term outlook has sent the Expectations Index into territory normally seen prior to a recession," said Lynn Franco, director of the Conference Board's consumer research centre.

Bond prices spiked and the dollar fell sharply on the unexpectedly quick unravelling in confidence, which some investors said raised the outside chance of a larger-than-expected Federal Reserve interest rate cut on Wednesday. The benchmark 10-year Treasury note ended up 20/32 and its yield fell to 5.23 per cent from 5.32 per cent at Monday's close.

The Feed's policy-setting Federal Open Market Committee on Tuesday began a two-day meeting to set interest rates shortly before the confidence report was released.

Markets had already considered a half-point cut in rates on Wednesday a virtual certainty. But the precipitous fall in confidence triggered talk that the Fed might go even further and slash 75 basis points off the 6.0 per cent federal funds target rate on overnight bank lending to ward off a recession.

Fed funds futures, a gauge of Fed expectations, rose on Tuesday to reflect a one-in-four chance of a 0.75 point rate cut.

Blue-chip stocks rallied in anticipation of another large Fed rate cut on Wednesday, with the Dow Jones industrial average ending up 1.67 per cent at 10,881. That was its highest close since Jan. 4, a day after the Fed surprised markets with a half-point cut in key short-term between scheduled meetings.

"It was a shockingly large drop in consumer confidence," said David Jones, chief economist at Aubrey G. Lanston.

"I would certainly view this as a danger signal for the economy. It guarantees the Fed will cut rates another 50 basis points and suggests further cuts are on the horizon."

Fed Chairman Alan Greenspan, in testimony to the Senate Budget Committee last Thursday, said it was a "critical issue" for the Fed to determine how much of a toll the slowdown has taken on consumer confidence.

The Conference Board, a private business research group, said consumer sentiment had not yet deteriorated to a point that suggested outright recession. However, Americans' optimism about the job market waned.

Those respondents expecting fewer jobs to be available over the next six months rose to 21.8 per cent from 15.7 per cent in December and up from less than 10 per cent a year ago.

While consumer confidence provided fresh evidence of weakness at the start of the new year, some analysts were jittery about the possibility of weaker-than-expected growth in the October-December period of 2000.

The government's first estimate of fourth-quarter gross domestic product (GDP) is due out early on Wednesday. Greenspan said he expected the number to be a small positive, though growth in the current quarter had since slipped "probably very close to zero."

Weakness in the manufacturing sector, along with a possibly sharp decline in business investment may drag the GDP number lower than the 1.9 percent annual rate forecast on average by economists in a recent Reuters poll.

"Tomorrow morning we may realise that we are already in recession," said Mark Vitner, economist at First Union Corp.

"I think there is a 50-50 chance that the GDP numbers we get are going to be negative and say that we fell into recession in October," he added. A recession is defined as two successive quarters of contraction in GDP.

GDP grew at a tepid 2.2 per cent pace in the third quarter of last year, a far cry from the blistering 8.3 per cent clip in the fourth quarter of 1999.

Separately, two weekly retail sales reports on Tuesday showed a slight rise during the week ended Jan. 27, but much of that was due to heavy discounting after the holiday season.

Adjusted retail sales rose 2.2 per cent during the fourth week of January compared to the same period in December, Instinet Research reported in its weekly Redbook Retail Sales Average. Sales so far in January rose at a 3.3 per cent pace compared to a year ago.

The Bank of Tokyo-Mitsubishi and UBS Warburg reported that retail sales rose by 0.6 per cent during the past week after a drop in sales in the prior week.

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