The Daily Interview: The Conference Board's Lynn Franco

These days, consumer confidence seems like an oxymoron.

Lynn Franco Director, Conference Board's Consumer Research Center

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The Conference Board was the bearer of bad tidings Tuesday, reporting that its Consumer Confidence Index sank to a four-year low in January. The index came in at 114.4, down from 128.6 in December and the lowest reading since December 1996. It also marked its fourth consecutive decrease, which bolstered the case for aggressive easing by the Fed .

The confidence level of the average investor/consumer has become one of the most significant variables in the outlook for 2001, with all of Wall Street -- as well as Greenspan & Co. -- keeping a close watch on the Board's numbers. For today's Daily Interview, TSC picked the brain of Lynn Franco, the director of the Board's Consumer Research Center, to get a closer read on the dwinding confidence levels that loom over the flagging U.S. economy.

TSC: Why is the Consumer Confidence Index so important?

Franco: It's so important because consumers account for two-thirds of economic activity and a confident consumer is more likely to spend than a cautious consumer. It's good to have a barometer of how they are feeling, so that whatever action needs to be taken really to keep the economy from slipping into a recession can be taken. If we didn't have a gauge, we wouldn't know that two-thirds of the economy right now was feeling so concerned.

TSC: What does the latest report tell us?

Franco: The latest figure shows us a very sharp decline in consumer confidence, which is due primarily to the fact that people are very apprehensive about where the economy is headed six months down the road. They don't feel we're currently in a recession, but that they feel there's good potential for one.

TSC: From December to January, the index had its biggest single-month drop since October 1990. What does that tell you historically, since the Conference Board's been tracking this for 33 years?

Franco: We had a rather large drop this month that we haven't seen since October of 1990. However, this one is different than the drop that we had back then in the recession because here it's basically all in the expectations. You know, in the forward-looking component, consumers still rate present conditions as somewhat favorable. So, what they're telling us is the economy is cooling and they're afraid it may cool too much to the point where we enter a recession, but that's not the case at the moment.

TSC: How much from this report should the Fed take into account?

Franco: You can see from the testimony that Chairman Greenspan has given that they have paid some attention not only to a bunch of other economic indicators, but to Consumer Confidence as well to gauge what action they should take and again it's just because consumers play an important role in the health of our economy. So, it's just one indicator in a slew of indicators that they look at to really gauge the health of the economy and what action, if any, they should take.

TSC: What does it take to turn consumer confidence around?

Franco: I think next month will be very telling because if we continue to see a deterioration in current conditions there really is no immediate cure for that. If the fear is not really based in reality, then perhaps the recent two cuts by the Fed will help alleviate concerns that we are slipping or about to slip into a recession.

TSC: Do the reports influence how a consumer spends?

Franco: Obviously, a more confident consumer is a consumer that's going to spend. The minute a consumer becomes apprehensive, he or she becomes a cautious spender and therefore likely to postpone big-ticket items. But this is a reflection of how people feel. It's a measure of their attitude.

TSC: How important has the index become to this market, as opposed to other years?

Franco: I think it has gained [in importance]. How much, I don't know. It's hard to measure. At times, it's been looked at to see if there's a pick up in the index, which would signal too-rapid growth and lead to inflation and that causes fears. Or, the market may look to it to see if consumers are very pessimistic to see if there's going to be a slowdown and the economy is going to continue to cool. It really depends on the period and the conditions that we are in as to how it's looked upon.

TSC: Is there a silver lining to the latest data?

Franco: The silver lining is that although consumers are concerned about a recession, the way they rate current conditions signals that we are not currently in one, so it may be prevented.