The slowdown in spending by consumers will be longer and harder than their retreat during the first Gulf war, says CIBC its latest Consumer Watch Report.

CIBC says consumers have been submitting “distress signals” for some time now, as reflected by the 7% drop in the Conference Board’s Index of Consumer Confidence. Consumers are reacting to world events, with the CNN effect and SARS adding to their caution about everything, including spending.

“We’ve seen consumer confidence fall steeply in the past six months,” says Benjamin Tal, CIBC World Markets’ senior economist. “This is significant because a drop of this magnitude – and so quickly – is usually followed by an economic slowdown. At this point, it’s now impossible for consumer spending to match last year’s performance.”

Tal notes recent developments in the housing and automobile markets, which together accounted for more than one-third of the increase in consumer spending in 2002. “These two pillars are past their peak,” he says.

Tal says he is not expecting a meltdown in the housing market, but he does not expect another wave of housing-related consumer spending to prop up the economic cycle. In fact, any upward potential is limited by the fact the housing market activity now is 30% than suggested by demographic factors and that any improvement in housing affordability is unlikely. The job market is expected to be “a shadow of its former self,” says Tal.

Tal says the 8% increase in auto sales in 2002 over 2001 is not sustainable and total sales are projected to decline by 5% in 2003.

In addition, he says that if the Bank of Canada is true to its word and raises the bank rate to its ‘neutral rate’ of approximately 4%, the spending picture will be even weaker. “We believe that the Bank of Canada will rethink its current hawkish position and allow a stronger Canadian dollar — the least damaging tightening vehicle from the consumer perspective — to do most of the heavy lifting.”