Feb. 26 - UF Survey: Confidence Falls As Consumers Are Shaken By Enron Scandal

February 26, 2002

GAINESVILLE, Fla. — Jitters about the Enron scandal helped sink consumer confidence in February after a slow but steady recovery since the Sept. 11 terrorist attacks, University of Florida economists said Tuesday.

The preliminary index fell three points to 89 in February, said Chris McCarty, director of UF’s survey research center at the Bureau of Economic and Business Research.

“There has been a lot in the news recently about the economy pulling out of the recession,” McCarty said. “While that may be true technically, as the consumer confidence numbers show it’s not a clear story.”

Economists point to a drop in jobless claims, a decline in layoffs and an increase in industry profits, McCarty said.

“On the negative side, consumer debt and therefore bankruptcies are quite high, signaling that consumer demand will not be strong in this recovery,” he said. “Further, like consumers, financial markets are still shaken by the Enron scandal and the possibility that this isn’t isolated to one company.”

Another indicator of declining confidence is the drop in the Conference Board’s index. For the last few months, the index had been rising, but this month it is down, McCarty said.

The component in the UF survey measuring perceptions of personal finances dropped one point to 79 this month. It is now at its lowest point since November 1993, when the economy was recovering from the last recession, McCarty said. This component has been falling steadily since June and was affected very little by the attacks, he said.

“It suggests that from the consumer’s standpoint, the economy has not recovered for them and is actually getting worse,” he said. “The sharp decline in the component measuring perceptions of short-term business conditions, which had recovered from the effect of the attacks and the war in Afghanistan, is now affected by perceptions of the effects of the Enron scandal and what it means for investment.”

That component, which measures perceptions of business conditions in the United States over the next year, dropped nine points to 81.

In another downturn, perceptions of whether it is a good time to buy big-ticket items such as cars and appliances fell four points to 104.

In addition to setting records for sales of existing homes, January turned out to be a good month for retailers as consumers used available credit, particularly from refinancing homes, to take advantage of dramatic post-holiday sales, McCarty said.

“However, with refinancing done, consumer debt high and banks becoming increasingly selective about lending, we cannot look to the consumer to pull us out of this recession,” he said. “If we are coming out of the recession, we should plan for a long and slow recovery.”

The center conducts the Florida Consumer Attitude Survey monthly. Respondents are 18 or older and live in households telephoned randomly. The preliminary index for February was calculated from 433 responses. Numbers for prior months are based on about 1,000 responses. The margin of error for the index is 4 percent.

Consumer confidence is designed to help predict buying patterns by measuring consumers’ mood about personal finance and the economy. Although other economic indicators also predict buying patterns, consumer confidence tends to be available sooner than those indicators.

The index is benchmarked to 1966, so that a value of 100 represents the same level of confidence for that year. The value of the index is in comparing changes over time rather than looking at an isolated month.