Loss of Confidence Threatens Economy
Index's Drop Adds to Recession Fear

By John M. Berry
Washington Post Staff Writer
Saturday, September 29, 2001; Page E01

The shock of the terrorist attacks of Sept. 11, the economic uncertainties they created and a wave of layoff announcements caused a sharp drop in consumer confidence that may undermine U.S. economic growth.

The University of Michigan's consumer sentiment index fell this month to 81.8, down sharply from August's reading of 91.5, analysts at the university said yesterday. Even more worrisome was the weekly number, which rose slightly last week but dropped to only 72.2 this week.

"The initial reaction of consumers to the terrorist attack was to reassert their confidence, but they quickly concluded that the repercussions of the attack would significantly harm an already weakened economy," said Richard Curtin, director of the survey. "A recession is no longer in doubt, the only issue is how long the downturn will last."

"The month-to-month correlation between any consumer attitude measure and actual spending has never been particularly strong," said Dana Saporta of Stone & McCarthy, a financial markets research firm. "But one has to assume that declines of the magnitude we have seen in sentiment indicators are going to translate into declining spending.

"Perhaps even more disconcerting, however, is that there is no indication that the decline in confidence is now over," Saporta said.

The Michigan findings echoed those released earlier this week by the Conference Board, a business research group. The Conference Board survey is conducted by mail while the Michigan survey is compiled using telephone interviews.

Immediately after the attacks, spending fell significantly in many parts of the economy. Airlines were grounded for several days, and now there are somewhat fewer flights scheduled and many fewer passengers are traveling on them. Car-rental companies, hotels and many restaurants report a sharp falloff in customers. Auto sales weakened steadily during September, according to a weekly nationwide survey of auto dealers conducted by International Strategy & Investment, a New York money-management firm.

Sung Won Sohn, chief economic officer at Wells Fargo & Co., said that even an "optimistic scenario" shows that U.S. economic activity probably declined at a 1 percent annual rate in the July-September period. The question is whether the economy might grow modestly in the last three months of the year or decline further. Many forecasters are predicting that the economic contraction will continue at least into early next year before falling interest rates, added government spending and probably tax cuts spark a revival of growth.

However, some economists and policymakers say that at a time when psychological concerns are a major factor in economic decisions, forecasts are far more uncertain than usual. For one thing, layoffs and the resulting increase in the current 4.9 percent unemployment rate may further undermine consumer confidence and cause even greater cutbacks in spending.

"The labor market picture is very bleak," said economist Jan Hatzius at Goldman Sachs Group Inc. in New York. "The deterioration in the economic outlook and the flood of layoff announcements since the attacks suggest that initial jobless claims will climb significantly above the level seen in the week of Sept. 22, which itself was the highest since 1992.

"Roughly speaking, our economic outlook of a 2.5 percent annual rate of contraction [in the inflation-adjusted gross domestic product] in the fourth quarter would imply a rise of initial claims into the 500,000 area, followed by a rise in the overall unemployment rate into the 5.5 percent to 6 percent area," Hatzius said.

Before the attacks, the U.S. economy was barely growing. The Commerce Department yesterday released a revised estimate that the GDP grew at a 0.3 percent annual rate in the second quarter, slightly faster than the 0.2 percent rate reported earlier. Before the attacks, many analysts had been expecting a number equally close to zero -- and perhaps a small negative number -- for the quarter that ends this weekend.