As interest rates fall, consumers recover some of their confidence

America's economy, despite higher stock prices in recent days, is still slogging through deep and murky waters.

A number of economists expect the troubled waters to recede - eventually. They just don't agree on when it will happen, or on how strong and sustained the recovery will be.

The one bright and shining spot in the economic front continues to be the steady, confident spending by American consumers. Buyers of cars, condos, houses, clothing, and appliances have kept many factories humming and construction workers busy.

A new nationwide survey released today indicates that those consumers - despite a rising unemployment rate - are increasingly optimistic about the economic outlook.

The Christian Science Monitor/TIPP survey completed this week found that after hitting a low point in April, the nation's economic optimism rebounded sharply in May.

The Monitor/TIPP "Economic Optimism Index" rose to 55 from just 52 last month. That's the highest level for the optimism indicator since the monthly survey was launched in February.

Even so, economists remain cautious because of several looming uncertainties, including a potential summer shortfall of energy supplies like gasoline and electricity.

Stan Shipley, an economist with Merrill Lynch, predicts that the nation's economy will gradually improve in the coming year, but he still hoists a caution flag.

Recession risk persists

"The risk of recession is not over," Mr. Shipley says. "We have several dead months ahead of us, and we have just lost 223,000 jobs in April. If people pull back on spending, it could have a cascading effect."

Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University, had expected to see business pick up by late summer. Now, after running through all the numbers again this week, he predicts no significant upturn until late fall.

Although first-quarter growth in the United States was only an anemic 2 percent, Dr. Dhawan warns that the April-June quarter could be even slower. He says that according to GSU's economic models, overall annual US growth could come in at a paltry 1.8 percent for the year.

A more upbeat assessment comes from Kenneth Goldstein, an economist at The Conference Board in New York City. Mr. Goldstein first points to all the bad economic news in the past year - the rising layoffs, the decline in manufacturing, the bursting of the dot.com bubble, and the sharp drop in stock prices - and observes that even with all of that, the jobless rate is up to only 4.5 percent.

There are continuing problems, Goldstein says, including an escalation of labor costs. When that is combined with an uptick in expenses for raw materials like energy, it has put a squeeze on corporate profits. But even with those obstructions, Goldstein predicts that the recent interest-rate cuts by the Federal Reserve, and the tax cuts working their way through Congress, should turn the tide by autumn. The result: Goldstein predicts that growth will rise to a 4.5 to 5 percent annual rate in the second half of this year.

The Monitor/TIPP survey suggests the public shares some of Goldstein's optimism, particularly in their personal finances.

The Economic Optimism Index consists of three components: confidence in federal policies, personal financial outlook for the next six months, and six-month outlook for the overall US economy.

The sharpest rebound in May was in the public's confidence in federal policies. This may reflect recent interest rate reductions, as well as the progress on cutting taxes.

Among various groups, confidence rose particularly among people making over $75,000 a year, as well as among investors, men, people over 65 years old, Southerners, and political independents.

The bullish South

"The South is clearly the leader. Month after month, it has been the most bullish region," says Raghavan Mayur, president of TIPP, a division of TechnoMetrica Market Intelligence, which conducted the poll.

Meanwhile, Democrats have been the most pessimistic group about the economy, and Republicans the most optimistic, Mr. Mayur says. The change in this poll came primarily from Independents, who jumped from 49 percent optimistic to 56 percent. "You can say this move [toward optimism] is real by looking at the independents," he says. "This perhaps reflects a boost in confidence in the new administration."

Young people like Bryce Kunimoto, one of those interviewed in the latest poll, have consistently been among the most optimistic. Mr. Kunimoto, who graduates this month from the University of California at Davis with a law degree, says, "My personal financial outlook in the next six months will definitely be better, because ... finally after 26 years I'll be able to make some money.... The legal market is still very hot."

He adds: "I think now's a good time to get into the stock market."

Staff writer Sara Steindorf assisted with this report.

(c) Copyright 2001. The Christian Science Monitor

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