Whom to believe--the Federal Reserve Board or the American consumer?
On Tuesday, the Fed met and decided to leave short-term interest rates unchanged, apparently confident that seven rate hikes over the past 14 months have been enough to slow the economy to a manageable pace.
Meanwhile, the New York-based research firm known as the Conference Board released its monthly consumer confidence poll for March, which showed Americans increasingly optimistic about the economy.
After easing for two months, the confidence index compiled from a survey of 5,000 households rose to 101 this month and is hovering near a five-year high. It had reached its nadir of just under 50 in 1992 and has been ratcheting higher ever since--along with U.S. economic growth.
In fact, even as the Fed was doubling interest rates last year, the confidence index continued to work its way up, belying the central bank's efforts to brake the economy.
Now, while the Fed has declared at least temporary victory in its quest for an economic "soft landing"--an idea loudly sanctioned by rallying stock and bond markets in recent months--the Conference Board index describes a level of consumer confidence that "has traditionally been associated with a reasonably strong economic performance," the group says.
The simple message there may be that short-term interest rates haven't yet peaked. The bond market seemed to glimpse that possibility on Tuesday, as yields snapped back after tumbling anew in recent days.
One economic statistic does not a trend make, of course. But because consumer spending accounts for two-thirds of gross domestic product, how Americans feel about their job security and about their household wealth is key to gauging the economy's prospects.
So the confidence index provides fresh ammo for Wall Streeters who have been trying to shoot down the belief that growth--and inflation--are contained enough to guarantee that the Fed is finished tightening credit. "We think it's just way too premature to rule out further tightening," argues William Dudley, economist at brokerage Goldman, Sachs & Co. in New York.
Michael Moran, economist at Daiwa Securities America, believes that the mild slowdown in consumer spending so far this year is a temporary lull, not a prelude to a sustained retrenching by most consumers. "We had rapid growth in spending in the fourth quarter, so it's not unusual to see consumers take a pause," he says.
If increased job security at all makes people more willing to spend money, another statistic from the Conference Board survey also adds bullish overtones to the economic outlook: The percentage of consumers who think jobs are "plentiful" has risen from 19.9% in November to 23.3% now, while the percentage who think jobs are "hard to get" has slid from 27.6% to 23.9%. (The rest describe jobs as "available.")
If the trend continues, the jobs-plentiful respondents will soon outnumber the jobs-hard- to-get respondents for the first time in five years.
Could that still be consistent with the kind of economy the Fed wants, which is a moderately growing one? Some economists put far less credence in the confidence data--what people say-- and focus more on what they actually do. Donald Straszheim, economist at Merrill Lynch & Co., argues that despite the Conference Board report, "every sector of the U.S. economy except trade will be weaker in 1995 than in 1994." Consumer spending, business spending, inventory replacement and government spending are all trending unmistakably lower, he says.
That is still the bet that stock and bond markets are making, as yields have dropped to last summer's levels and stocks have hit record highs. The problem now is that there is very little wiggle room, especially for bond bulls, says economist William Sullivan at Dean Witter Reynolds. Long-term interest rates are at levels that assume short rates will stay flat or fall, he says.
Yet Sullivan sees consumers spending freely again in the second and third quarters, in part pumped up by the boost in wealth provided by higher stock prices and still-generous bank CD yields (which have only edged marginally lower in recent weeks). That will force the Fed to raise rates again "no later than July," he predicts. Like it or not, "the next big change in short-term rates is up, not down," Sullivan says.
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From a monthly survey of 5,000 U.S households. Index: 1985 = 100.
Jan 1994: 82.6
Mar 1995: 101.0 Source: Conference Board