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U.S. confidence tumbles
January 30, 2001: 12:14 p.m. ET

Key gauge of consumer sentiment falls to lowest level in four years
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NEW YORK (CNNfn) - U.S. consumer confidence plummeted to its lowest level in four years in January, a private research group reported Tuesday, further boosting hopes that the Federal Reserve will cut interest rates again to help a sputtering economy turn around.

The survey comes as Fed policymakers launched a two-day meeting that many analysts expect will result in another rate reduction. The closely monitored report is the latest piece of data suggesting that the economy has slowed significantly.

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The Conference Board's key gauge of consumer confidence fell to 114.4 in January from a revised 128.6 in December. It was the lowest consumer confidence reading since a 114.2 measurement in December 1996 and the fourth consecutive monthly decline, the New York-based group said.

Analysts polled by had expected the figure to come in at 125.

The gauge hit an all-time high of 144 last year.

graphicThe report's Expectations Index, which tracks how consumers view the next few months, slid to 77 in January from 96.9 in the previous month, triggering worries that consumers will rein in their spending as they become more pessimistic about the economy.

"Consumers' increasing pessimism about the short-term outlook has sent the Expectations Index into territory normally seen prior to a recession," said Lynn Franco, director of the Conference Board's consumer research center. "But consumers' assessment of current business and labor market conditions, while declining, does not yet suggest the economy has completely run out of steam."

The percentage of respondents expecting business conditions to improve fell to 12.4 percent from 16.9 percent in December, while those expecting the job market to worsen rose to 21.8 percent from 15.7 percent in the previous month.

A 'deadly spiral'

Economists said the key question is how consumers act on their fears.

"Historically, when we see confidence decline, we have to watch and see if it shows up also affecting spending," Gary Thayer, chief economist with A.G. Edwards & Sons in St. Louis, told the Associated Press. "We'll be watching closely to see ... whether the decline in confidence is more of a psychological factor or a real factor affecting spending."

Unfortunately, a recent onslaught of tens of thousands of job cuts could have enough of a psychological effect on consumers to cause them to curtail their spending, economists said.

"Keep in mind, consumer confidence is tied to your job," Kathleen Camilli, chief economist at Tucker Anthony told CNNfn.

"If the consumer gives up here -- if these layoffs lead to a break in confidence and more cutbacks in spending later, we will be on the brink of or perhaps into a recession," David Jones, chief economist at Aubrey G. Lanston told CNNfn.

Jones warned that the layoffs could contribute to a "deadly spiral" of "weaker growth, more layoffs and weaker consumer spending."

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Most observers expect the Federal Reserve will cut interest rates by a half percentage point following the conclusion of the two-day meeting Wednesday afternoon. But now, some observers say a more dramatic move may be necessary in light of the plunging consumer confidence numbers.

Robert Heller, a former Federal Reserve governor, told CNNfn's Market Call that he believes the Fed should slash interest rates by at least three-quarters of a percentage point.

"In a zero-growth environment, you need action right now," he said. "Anything you provide later on is too little, too late." (387K WAV) (387K AIFF)

The Conference Board index, based on a monthly survey of about 5,000 U.S. households, is closely watched because consumer spending accounts for two-thirds of the nation's economic activity. The index compares results to its base year, 1985, when it stood at 100.

Bond prices rose on the data. Stocks showed little immediate reaction; investors focused on anticipation of the outcome of the Federal Reserve meeting in Washington. graphic