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Perceptions Count

By Joseph Lisanti The employment numbers are sending conflicting signals to Wall Street. On the plus side, a weak jobs picture makes any Fed tightening appear less likely. On the minus side, the concern is that fearful consumers will reduce spending.

February retail sales, excluding autos, were basically unchanged from January and somewhat below expectations.

Furthermore, various measures of consumer confidence are weakening. But disposable income is now growing faster than personal income, as last year's tax cuts continue to pump money into consumers' pockets.

Since U.S. consumers tend to spend their cash rather than save it, we suspect that they will increase their spending at the mall in short order. Nevertheless, consumers are saying that they are concerned about the future, and that is a worry for investors. The current dip in stock prices appears to be the correction that we have been looking for. Right now, we believe that it will be contained, and that stocks will resume their climb.

But could anything cause stocks to go into a prolonged swoon? A prime candidate is this year's election campaign. In 1992, James Carville, then a key advisor to candidate Bill Clinton, had the following slogan framed in his office: It's the economy, stupid.

The truth in that adage is that people usually vote their pocketbooks. But a truer version might be: It's the perception of the economy, stupid. Even though most Americans are employed and the income they have to spend is increasing, the loss of some very visible white-collar jobs to either increased automation or outsourcing can have a major psychological effect. We think that is affecting consumer attitudes.

With the presidential election shaping up to be as close as the 2000 contest, we will likely hear much more about employment in the months ahead. If the debate makes consumers more worried and cautious, investors could start to question the sustainability of this recovery. Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook

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