'Motionless' US economy eats at consumer optimism

The drip, drip, drip of layoffs, affecting both blue- and white-collar workers across the United States, has apparently begun to wear at the confidence of many consumers - including the wealthiest.

That spells trouble for an economy that, despite six Federal Reserve interest-rate cuts this year, is still struggling to get going again.

Whether it's buying a car or adding to family credit-card balances, caution is the new watchword.

For months, solid consumer spending has helped offset continuing declines in industrial output. It isn't falling to pieces just yet, but fewer shoppers are falling into The Gap.

Prosperous Americans, in particular, are feeling decidedly less rosy about the economy, according to a new Christian Science Monitor/TIPP poll.

In the nationwide poll, conducted Aug. 8-12, families earning $75,000 or more a year saw the six-month outlook plunging from a mildly optimistic 52.5 reading in July to a pessimistic 46.2 in August.

"It's starting to take its toll," says pollster Raghavan Mayur, referring to the rise in layoffs, which by one measure set a record in July. "Consumers are hit by the negative economic news all around."

Among all income groups together, the six-month outlook rose slightly, but still came in at 46.7, a pessimistic level.

Yet, the poll's broader "economic optimism index" remained in modestly positive territory for the month: up slightly at a reading of 54.4.

The index, the first nationwide measure of consumer confidence released so far this month, factors in people's views of government economic policy and their own personal well-being, along with the six-month outlook on the economy.

The mixed results reflect an economy that has stayed so flat for so long that no one can say when it will turn up.

The image of a "motionless economy" was also bolstered yesterday by the Commerce Department, which reported that retail sales were flat in July.

Consumers, in essence, remain the shaky pillars of the economy. They spent a bit less at auto dealerships, a bit more at restaurants and sporting-goods stores. It was the second flat month in a row.

Separately, last week Saks and the Gap reported falling sales, while shoppers hit discount retailers instead.

LOOKING ahead, if the most-affluent families dip less often into their wallets, it could be a blow to the prospects for economic recovery.

Business spending has been plunging and the stock market is still faltering, so economists have been counting on continued consumer outlays to prop up the economy as they wait for it to reignite.

It has been a long wait.

Many economists have been disappointed by the length of the slump that started late last fall. They are counting on the Federal Reserve to trim interest rates another 0.25 percentage points when its policymakers meet next Tuesday - and maybe make more cuts later.

Economists at Goldman, Sachs & Co. note a "substantial slowdown" in the growth of consumer borrowing, along with other signs of "a more cautious household spending trend."

A $1.6 billion drop in total installment debt during June was the first decline in nearly four years, the economists say. The New York investment bank has marked down its forecast, but still anticipates a "modest pickup" this fall and humble 2 percent growth, after inflation, next year.

"The economy is, at best, dead in the water," holds Brian Wesbury, chief economist for Griffin, Kubik, Stephens & Thompson, a Chicago brokerage firm.

He expects interest-rate reductions and the tax cuts pushed through Congress by President Bush to revive the economy early next year.

Those in the poll share economists' concerns, but also display fairly positive views about their own well-being.

Jane Branch, an insurance worker in Addison, Mich., appreciates Mr. Bush's tax rebate, which she expects to use to reduce credit-card debt.

Selena Grey, a retiree in Centennial, Colo., figures the US economy is "definitely on a downswing" and may slide into recession.

Though making under $10,000 a year, she says she feels "fantastically wealthy." Her house is paid off and she "does not want much."

The poll's index of Americans' personal financial outlook has slipped from 62.3 in June to 60.6 in August, the largest decline since Bush took office in January.

Yet the personal optimism of those over 65 took a big jump in August.

Mr. Mayur, who is president of TIPP, a unit of TechnoMetrica Intelligence Inc., suspects this has something to do with their expectation for a federal prescription-drug benefit that could reduce their costs. "It raises their sense of confidence about life," he says.

Steven Savides contributed to this report.