Michigan Sentiment Number Adds to Slowdown Gloom

A fresh decline in the University of Michigan's Consumer Sentiment Index is the latest in a barrage of anecdotal evidence showing the economy is deteriorating at a rapid pace.

The preliminary read on the index came in at 93.4, its lowest level since 1996 and 5 points below the December level. Economists had expected the index to come in at 99.

"I'm surprised people had that estimate as high as it was," says Tony Crescenzi, chief bond market strategist at Miller Tabak. "Given the economic news and the constant media attention, it should not be surprising at all that we saw this much of a dip. There has been so much discussion of recession that it's bound to hurt confidence."

Consumer Sentiment Index February 1966 = 100

Source: University of Michigan

Although historically the Michigan survey has been, at best, a secondary piece of economic data, the speed with which the economy is apparently declining has made such anecdotal evidence more important. In fact, December's preliminary reading on the index, which also showed a sharp decline, was one of the first harbingers of how quickly U.S. growth was decelerating. Since then, the evidence has mounted.

The sharp decline in the Purchasing Managers' Index is generally reckoned to have been what prompted the Federal Open Market Committee to cut rates by a half-point earlier this month. Yesterday's drop in the Federal Reserve Bank of Philadelphia's Business Outlook Survey suggests that the domestic outlook for U.S. manufacturers has only got bleaker.

The slump in sentiment also suggests a softening in the labor market -- and more than anything else, worries about job security take a toll on consumer confidence. There was a record number of layoff announcements in December, and initial jobless claims have been rising steadily.

That consumers are getting more nervous makes the FOMC's job only harder. In what's known as the paradox of thrift, when everybody cuts back their spending, the economy slips further, which only leads to more caution.

"When confidence begins to fall," says Crescenzi, "it falls precipitously. That's what the Fed has to worry about."