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The Mall Measure of Consumer Confidence

By Christopher Farrell One way to look at how expansions end and recessions start is when a shock creates so much uncertainty that the normal optimism of managers, workers, and consumers shatters. After all, households typically borrow enormous sums of money every year to buy homes and cars. Business invests billions in new plants and equipment. Entrepreneurs create millions of new companies, and workers willingly leave their jobs for other opportunities.

The economy runs on the hopefulness that all these bets will work out. But the economy's normal ebullience deflates under the impact of a traumatic event, such as the 1973 OPEC oil shock or the 1990 Persian Gulf War (see table).

Certainly, confidence cratered and spending fell following the events of September 11. The question is, for how long? Maybe for a lot less time than many of us thought probable in the tragedy's immediate aftermath.

MINNESOTA ANOMALY? It's likely that investors are still in for a rough patch in coming weeks, but the markets are sensing a shift in the nation's mood. The Standard & Poor's 500-stock index is up almost 20% since its Sept. 21 trough. The market's sensitivity to consumer confidence is hardly surprising considering that about half of U.S. households own equities and pocket a paycheck. The combination of low interest rates, tame inflation, and cheap energy are repairing consumer spirits (see BW Online, 11/21/01, "A More Joyous Scenario for Holiday Sales").

For anecdotal evidence, two weekends ago I drove to the Southdale Mall in a suburb of Minneapolis. I went to pick up some shirts and ties on sale at Marshall Field's, thoroughly expecting to make a quick run in and out. Instead, the parking lot was jammed, and I ended up circling for several annoying minutes before finally grabbing a space.

Curious whether this was just a Minnesota anomaly or a sign of something more, I called several colleagues around the country, and most had shared a similar experience. And then the government reported that retail sales increased more in October than in any month in 10 years of recordkeeping.

CHEAPER ENERGY. It's clear that shoppers are being lured to stores by steep discounts on all kinds of goods, from clothing to furniture. Consumer price inflation is up a mere 2.1% over the past year, and every indication is that further price declines are in store. Indeed, if history is any guide, the consumer price index declines by about a percentage point in the first year of an economic rebound.

Trips to the mall are a lot less expensive than during the summer, too. The weak global economy is awash in crude oil, with the OPEC unable to get nonmember producers to cut back on their production to prop up prices. Lower energy prices are a boon to consumers. Economists at Merrill Lynch estimate that if oil prices stay under $18 per barrel, consumers will save up to $90 billion next year.

Consumers are also repairing their balance sheets. With short-term interest rates at their lowest level since the Kennedy Administration, and long-term rates down to the levels seen during the Johnson Administration, homeowners are refinancing their mortgages at a record pace.

WIDESPREAD SUFFERING. Even so, the economic statistics are disconcertingly ominous. The Organization of Economic Cooperation & Development now predicts that in the aftermath of the September 11 terrorist attack, which "inflicted a severe shock to the world economy," the gross domestic product (GDP) of its 30 members will shrink in the second half of this year.

In the U.S., employment is down, and corporate earnings are terrible. Seventeen states are in a recession, including New York, Michigan, and Arizona. Manufacturing, telecom, travel, lodging, and other industries are reeling. "A defining feature of the current recession is its breadth," says Mark Zandi, chief economist at "Not since the very debilitating recessions of the early 1980s have so many regions, industries, and national economies contracted simultaneously."

So the recession is far from over -- actually, it's still gathering momentum, especially on the employment front. And, of course, there's always the risk of another terrorist attack. Nevertheless, improving consumer confidence is a good reason for thinking that the recession will be short-lived.

Economic Shocks That Led to Recessions




Terrorist attacks


Persian Gulf War


Monetary restraint


OPEC oil shock, credit controls, monetary restraint


OPEC oil shock, monetary restraint


Monetary and fiscal restraint


Fiscal restraint


Monetary restraint


Post-Korean War fiscal restraint


Post-World War II fiscal restraint


Farrell is contributing economics editor for BusinessWeek. His Sound Money radio commentaries are broadcast over National Public Radio on Saturdays in nearly 200 markets nationwide. Follow his weekly Sound Money column, only on BW Online

Edited by Beth Belton

Farrell is contributing economics editor for BusinessWeek. His Sound Money radio commentaries are broadcast over National Public Radio on Saturdays in nearly 200 markets nationwide. Follow his weekly Sound Money column, only on BW Online

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