The gloomy look of recent economic news gave way to hope Friday as consumer confidence edged up in early November and wholesale prices took a record drop in October.
Neither report was conclusive in pointing to better times ahead, but both solidified forecasts by many analysts that the current downturn will be shallow and that prices will not surge when the economy picks up again.
The reports also underscore that while the economy is sinking into recession and joblessness is rising, not every indicator is negative.
The steep 1.6 percent plunge in last month’s producer price index signaled that consumer prices may also have fallen, and likely will be tame in the immediate future.
Consumer confidence had been staggered by the Sept. 11 terrorist attacks, but the University of Michigan reported Friday that its preliminary November consumer sentiment index rose for the second month in a row, this time from 82.7 to 83.5.
Although this report contrasted with a sharp decline in consumer confidence last month as published by the Conference Board, economist David Wyss of Standard & Poor’s said the University of Michigan survey stresses buying conditions rather than the overall state of the economy.
“It clearly is a good time to buy a car even if the economy is bad,” he said.
Indeed, car and truck sales recently have boomed because of zero-interest rate financing offered by automobile companies and apparently were a factor in the rise in the Michigan consumer confidence survey, according to Wyss.
“Zero financing today is not as big a bargain as it was in the past because interest rates are much lower,” said Paul Kasriel, economist at Northern Trust Co. in Chicago. “But they were not giving the cars away. Someone had to commit to paying them back.”
The two prominent consumer confidence surveys have been at odds in the past. Lynn Franco, director of the Conference Board’s report, said her organization’s mail survey asks two questions about current economic conditions and employment and three questions about consumers’ expectations about their jobs and economic conditions six months ahead.
“Ours is heavily influenced by labor market conditions,” she said. “And that’s the main difference.” The jobless rate surged from 4.9 percent to 5.4 percent last month, and many economists believe it could easily reach 7 percent next year.
Confidence up from low levels
Brian Wesbury, chief economist at Griffin, Kubik, Stephens and Thompson Inc., a Chicago investment firm, said that while consumer confidence has gone up, it remains “very low.”
He agreed, however, that the small rise indicated some possible stabilization of the economy and supported the idea that the economy will not sink into a long and deep recession.
Wesbury said the record fall in producer prices was more significant for the U.S. economy. It showed that the nation could be experiencing actual deflation for several months in a row, he said. Many of the wholesale price drops in October are being reflected in consumer prices as well, he said.
“We have deflation in our economy on a much wider scale than people had thought,” Wesbury said. Consequently, prices on a variety of goods will move lower during the economic downturn, squeezing business profits, he said.
Low prices give Fed latitude
Falling prices will give the Federal Reserve more room to continue cutting interest rates, he and other economists said. Analysts now believe that the Fed will ease by another full percentage point over the next two months, bringing its benchmark overnight bank lending rate to 1 percent.
Kasriel said the U.S. will not experience the same kind of deflation as Japan because the Fed has been more generous than the Bank of Japan in pumping new money into the economy.
The drop in wholesale prices occurred chiefly in the energy sector–good news for the economy, since higher energy prices not only raise inflation, but depress economic growth.
Chiefly because Americans hunkered down after the terrorist attacks, gasoline prices dropped by 21.2 percent in October after a 6.3 percent rise in September and 8.7 percent in August. Prices for finished energy products dropped 7.7 percent. Natural gas prices went down 27.5 percent and oil prices fell by 19.6 percent.
Car prices tumble
And, reflecting the general state of the economy, new-car prices fell 4.7 percent last month after jumping 1.3 percent a month earlier.
Jerry Jasinowski, president of the National Association of Manufacturers, said the inflation report “takes inflation off the radar screen and opens the door for further interest rate cuts by the Federal Reserve.”
Incentives by the automakers were responsible for the increased car sales last month, Jasinowski said. “If consumers take advantage of these incentives and purchase autos in the fourth quarter instead of waiting until next year, the recession will not likely be as deep,” he said.
