Consumers are starting to be concerned about the labor market according to measures of consumer confidence. The Conference Board consumer confidence index has fallen 18.2 points in the last two months to 114.4, while the University of Michigan consumer sentiment index has fallen 12.9 points to 94.7. Nevertheless, consumers continue to spend at a fairly strong rate. Consumers have backed away from buying durable items but have continued to increase their spending on services. This suggests consumers have little cushion to fall back on as salary growth slows.
Consumers employed in the manufacturing sector have most reason to be concerned.
The manufacturing sector continues to layoff heavily, shedding another 65,000 jobs in January. The outlook for manufacturing continues to remain poor as indicated by the decline in the Chicago Purchasing Managers' Index to 40.2, the lowest reading since 1982, and the drop in the NAPM index to 41.2. According to Morgan Stanley, the average low point of the NAPM index in the last five recessions has been 42.0, nearly a point higher than the current level. We look for continued reductions in monetary policy in the first half of 2001 and a more accommodative fiscal policy by the second half. How soon the economy recovers depends on how much the consumer ultimately retrenches.