Skip to main content

Consumer confidence continued its steep decline in April, but economists were mixed about whether that drop, together with weakness in the March retail sales data that were released today, was enough to encourage a more aggressive schedule of interest-rate cuts from the

Federal Reserve.

Last Friday, a weak report about the state of employment during March inspired optimism in some camps the Fed might cut interest rates as soon as this week. If that happened, it would come several weeks before the next official meeting of the monetary-policy body. But those hopes were dashed on Tuesday by

St. Louis Federal Reserve

President William Poole, who said "the U.S. investment climate remains robust" and gave 50 percent odds for a "gradual increase in economic growth as 2001 progresses."

That's a bright outlook for an economy that Fed chairman

Alan Greenspan only a few months ago said essentially stopped growing. Several times in the recent past, Greenspan has said he expects the pace of economic growth to pick up in the second half of the year.


University of Michigan's


consumer sentiment index, released Thursday morning, fell to 87.8 from 91.5 in March, its lowest level since November 1993. This time around, economists were expecting the index to drop to just 90.4. The new low reinforced the message of Thursday's retail sales report. The labor markets are weakening and consumers are keeping tighter rein on their spending. Retail sales dropped 0.2% in March compared with economist forecasts they would remain unchanged from February.

Consumer spending is an important driver of the U.S. economy, contributing about two-thirds to the total

Gross Domestic Product

. Slowing consumer confidence, which hurts consumer spending, can take a real bite out of the economy. Meanwhile, what's known as the current conditions component of the consumer confidence index fell this month much more sharply than the expectations component. This indicates deterioration in the economy is catching up with the consumer outlook. The current conditions component dropped to 98.7 from 103.4 in March, while the expectations component fell to 80.8 from 83.9 in March.

If the retail sales and consumer confidence data alter the Fed's calculation the economy will rebound in the second half of this year, the central bank could step up its rate-cutting schedule. Indeed, the Fed has said at recent meetings that it would be closely watching confidence and spending reports for signs of weakness.

Merrill Lynch

was arguing that Thursday's data could push the Fed to cut interest rates as much as 50 basis points before its next policy meeting -- possibly as soon as next week. Merrill Lynch said the same thing last week on the heels of a very soft jobs report. "All the data we have received is more consistent with more weakening, than with a rebound," Merrill Lynch economist Mary Dennis said on Thursday. "Particularly the consumer confidence levels, because they are now at a level not seen since the last recession."

Merrill didn't care that it was becoming a lone voice. "We are still one of the few people thinking that the Fed could cut interest rates intermeeting," Dennis said. "The Fed could cut interest rates as soon as next week."

Wayne Ayers, chief economist at

Fleet Financial Group

, disagreed, saying that, on a quarterly basis, the economy still looks relatively strong. "Sometimes economic conditions call for aggressive action, but this time is not one of them," he said. "If you look at the quarter as a whole, it's been pretty strong -- it even looks like things may have stabilized a bit. The Fed will want to take that kind of perspective -- a quarter-by-quarter approach."

To breathe life back into the economy, the Fed has cut rates by 1.5 percentage points since the start of the year. But some say it has been reluctant to be more aggressive about cutting rates because the economic data released in recent months has not pointed to a traditional economic recession. While it's clear U.S. businesses are being hit by a profits recession, the traditional indicators of an overall recession -- weakness in housing, consumer confidence and employment -- all have held up relatively well. The question is whether consumer confidence weakened enough to point to a full-blown recession. Therein lies the debate.