UF Survey: Dubious Accounting Practices Damage Consumer Confidence

July 30, 2002

GAINESVILLE, Fla. — Recent corporate accounting scandals helped sink consumer confidence to its lowest level in eight months in July, raising concerns the country may be entering another recession, University of Florida economists said today.

Florida’s preliminary consumer confidence index fell five points to 89 this month, its lowest level since November, said Chris McCarty, director of UF’s survey research center at the Bureau of Economic and Business Research.

“It appears that questionable accounting practices among some of the largest corporations has called the very legitimacy of the stock market into question among consumers,” McCarty said. “Consumers have been advised for over a decade to maximize contributions to retirement accounts. Now we see people just like us with little to show for that diligence. This is translating into pessimism among consumers about their own finances and the economy in general.”

The fall in confidence among Floridians occurred in all five components that make up the index.

The largest drop was the component measuring perceptions of U.S. business conditions over the next year, which fell by eight points to 76. Historically, this component is the most vulnerable to short-term shocks and bad news, McCarty said.

The component measuring whether it is a good time to buy big-ticket household items often purchased on credit fell by six points, despite low interest rates and a resurgence of bargains extended by retailers.

Last spring, most economists were declaring the recession over and saying a recovery, albeit a sluggish one, was well on the way, McCarty said. Now some economists are talking about the possibility of a double-dip recession, he said. This occurs when the economy comes out of a recession but isn’t strong enough to maintain continued positive growth and quickly reverts to recession again, he said.

Other economists have suggested the United States could experience a deflationary spiral, such as the one gripping Japan for the past decade, he said.

In such a scenario, banks are unwilling to extend credit to companies despite low interest rates, and companies must lower prices to compete for sales, McCarty said. Consumers refrain from buying, anticipating that prices will continue to fall, resulting in companies laying off employees to compensate for lower profits, he said.

“Unfortunately, it looks as though the U.S. economy will once again be looking to increased purchases by consumers to keep it afloat,” McCarty said. “Business investment is not likely to recover its losses in the near term, and exports have been decreasing for quite some time. The protectionist trade policies of the current administration are not helping in that regard.”

Instead, consumers are slowing their borrowing and trying to pay off their debts, he said.

“Consumers are not in the position to fuel the recovery, as is evidenced by the fall in confidence,” he said. “Most of those who would refinance (mortgages) have done so, and personal income growth is slow.”

The research center conducts the Florida Consumer Attitude survey monthly. Respondents are 18 or older and live in households telephoned randomly. The preliminary index for July was compiled from 460 responses. Numbers for prior months are based on about 500 responses. The margin of error for the index is 4.5 percent.

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.