--U. Mich analyst: Recession likely if confidence keeps falling
--U. Mich analyst: Spending to be "close to zero" in first half
--U. Mich analyst: Econ to be very close to recession first half
--U. Mich analyst: Index drop to near 80 to spark more concern
--U. Mich analyst: Rate cuts to buoy confidence in second half

By Deborah Lagomarsino, BridgeNews
New York--Feb. 5--Confidence is likely to fall further, but not as fast as it has been because the Federal Reserve's rate cuts should help buoy consumer sentiment, said Richard Curtin, the director of the Surveys of Consumers at the University of Michigan. Even so, consumer spending is likely to be close to zero in the first half of the year when economic growth will be "very close to being defined as a recession," Curtin told BridgeNews in an interview Friday.
* * *
The University of Michigan's consumer sentiment index slid to 94.7 in January, its lowest level since September 1996, from 98.4 in December. The index has plunged 15.2 points since November, making it the third largest two-month decline on record. The only larger two-month drops were seen before the 1980 and 1990 recessions, the University of Michigan said. Curtin said he believes the "worst is probably over" in terms of how fast confidence has been deteriorating, but said confidence is likely to fall further in coming months as consumers absorb the layoff announcements that will only add to their nervousness about the economic outlook.
"Confidence will go down. What we'll see now is a lot of the fallout in terms of the increased layoff announcements and job losses. This will dominate consumers' attention. We'll see this working to heighten people's sense of uncertainty and combined with a very low savings rate, they have reason to be concerned," Curtin said.
The financial markets have always paid close attention to confidence measures, but those indicators jumped to the top of traders' watch lists after Federal Reserve Chairman Alan Greenspan testified Jan. 25 that the crucial issue is whether the weakness in the economy "breaches consumer confidence."
Since Greenspan's remarks, the Conference Board reported Jan. 30 that its confidence index plummeted 14 points to 114.4 in January from 128.6 in December, the largest drop in the index since October 1990. And now the University of Michigan's January index is showing a further confidence slump.
Curtin said if the University of Michigan confidence index continues to slide, "we will have a recession."
He pointed out that the index he oversees "measures the willingness of consumers to make discretionary purchases and without those expenditures the economy suffers."
It's possible the Federal Reserve's percentage point rate cut in the month of January keeps the economy from entering a recession, but Curtin said it's not going to be enough to avoid very weak spending and sales in the first half of the year.
AT THIS POINT, ECONOMY COULD GO "EITHER WAY"
"The outlook is a series of pluses and minuses. Vehicle sales, large household durables and PCs are on the negative side. On the positive side, we're going to have some more home refinancing, which will free up money to spend on other things and how these things work out is, of course, the issue," Curtin said.
He expects consumer spending to be "close to zero" in the first half of this year when economic growth will be "very close to being defined as recession," but he looks for the outlook to brighten in the second half. "It's likely that we would have a negative quarter, but whether we have two negative quarters and enough to justify a call for recession. I'm not sure," Curtin said.
"We may avoid the technical definition of a recession," he added. Curtin expects the Fed's rate cuts to help buoy confidence in the second half when he expects the positive impact of lower interest rates will outweigh consumers' job worries.
When the economy entered recession in 1980 and 1990 it happened with falling confidence, rising inflation and rising interest rates, he said. If the economy is heading toward recession now, it is doing so this time with falling confidence, but "falling interest rates as well and that will mitigate these declines (in confidence) by brightening future prospects," Curtin said.
"We have a Fed who is right on top of it," he added.
But Curtin acknowledges that the big risk is that consumers aren't able to shake their gloomy employment outlook and the economic downturn persists into the second half.
"The most significant risk is if doesn't come back and that we fall into this kind of job apprehension slump where it's hard to break out," Curtin said.
"I definitely think we can go either way. My judgement is that we will improve in the second half, but I don't dismiss the alternative at all," he added.
The University of Michigan's survey for January shows that consumers expect the jobless rate, which is now at 4.2% to climb to 4.75% by the end of the year.
He said he would become more worried about the economy if the University of Michigan sentiment index slid into the low-80s, which would be below its historical average over the last 50 years of 85. "If the index fell in January to the low 80s, we would be calling a recession," Curtin said.
"If it gets below the mid-80s, it's below average and it becomes very concerning, but that it has fallen as much as it has already means that people are using their sense of caution and cutting back on spending already," he said. End