Economic data released by the University and the U.S. Department of Labor on Friday reinforced an uncertain outlook for the economy predicted by the American Customer Satisfaction Index early last week.
Consumer spending comprises nearly 70 percent of the U.S. Gross Domestic Product and consequentially, consumers’ outlook and spending behavior are a major indicator of where the economy is headed, said Business Prof. Claes Fornell, director of the ACSI.
For January, the University’s consumer confidence index stood at 95.5 and the index was anticipated to continue at this level during February. However, on Friday, the University released its preliminary results for this month and revised the consumer confidence index down to 94.2, indicating a decline in consumer confidence.
The Labor Department’s Producer Price Index, which tracks inflationary tendencies in the economy, showed that wholesale prices for goods — excluding food and energy — rose by 0.3 percent during January. While the rise seems small, it is the largest increase in the past six years and may lead to a rise in consumer prices as well.
“Consumer sentiment is dropping, consumer spending is dropping and prices are rising — all are bad news,” he said. “We are in for uncertain times at best.”
The ACSI attributes the decline in consumer spending to factors such as high oil prices and low customer satisfaction with retailers’ goods and services.
During the holiday season, retailers discounted goods to attract customers, though this resulted in longer lines and slower service, Fornell writes in the ACSI report.
Consumer satisfaction with transactions on the Internet fell as well because companies experienced difficulty providing customer service due to increased traffic on the Web, ForeSee Results CEO Larry Freed said in the report. ForeSee Results is a sponsor of the ACSI.
“Amazon has moved well beyond books and music and has morphed into an online shopping mall, selling everything from garden appliances and apparel to electronics and used books. But bigger isn’t always better from a customer’s viewpoint,” Freed said in the report. “Barnes & Noble stayed true to its business model and product offering, which makes it easier to service demand well and sustain higher levels of customer satisfaction.”
U.S. consumer satisfaction with the economy has held strong over the past two years with steady increases, but the latest results put an end to the increases, marking the index’s largest decline in more than seven years, according to the ACSI.
At the end of the third quarter of 2004, the ACSI stood at 74.3 while the fourth quarter number fell nearly 1 percent to 73.6.
While this decline may seem relatively small, the impact on GDP growth is large because consumer spending makes up a large portion of GDP.
“If consumer spending grows at less than the normal 3.8 percent annual rate, the GDP growth rate will take a hit as well, though growth will not be negative necessarily,” Fornell said.
According to ACSI report, a drop of .3 points in the consumer satisfaction index indicates consumer spending will grow at 3.2 percent. This slowdown in consumer spending causes GDP to fall by nearly $46 billion annually, the report said.
In light of the latest ACSI data, Fornell said that in the first quarter of this year, consumer spending growth will probably fall to 2.3 to 2.7 percent.
“It’s very difficult to say what will happen in the long term but there are serious imbalances in the economy that must be dealt with such as a huge deficit and trade imbalance,” Fornell said. “We run the risk of financial uncertainty.”
In order to offset the effect the decline in consumer spending has on GDP, business investment and government spending need to rise, though such increases are unlikely, Fornell said.
“Gross Domestic Product growth will also be more difficult if consumers reduce their rate of spending,” Fornell said in the report. “There will be more pressure on the dollar and higher interest rates as a result. Higher rates, in turn, don’t encourage companies to devote more resources to satisfying customers. As interest rates rise, the value of the returning customer diminishes because future income streams become more heavily discounted.”