www.usatoday.com Posted 2/25/2003 10:52 PM     Updated 2/26/2003 8:44 AM By Sue Kirchhoff and Barbara Hagenbaugh, USA TODAY

WASHINGTON — Consumers are fed up. The question is whether they're tapped out.

Consumers' confidence in the economy plunged to its lowest in nearly a decade in February, with shoppers worn down by fears of war with Iraq, a stagnant job market, rising gas prices, falling stock prices, terrorism alerts and likely cabin fever at the end of a rough winter.

The sharp 15-point drop Tuesday in the New York-based Conference Board's consumer confidence index was the largest since the 2001 terrorist attacks and mimicked a similar steep decline before the 1991 Gulf War. It raised concerns Americans might be preparing to stay away from the mall and instead stay home and watch the news.

LOOKING AT THE GLASS Reasons to see it half empty: 1-Stock prices continue to fall. The S&P 500 index is down 45% from its high in March 2000. 2-Energy prices are soaring. Gasoline prices are up nearly 50% from a year ago. Home heating costs are also gaining. 3-Uncertainty about when or if the United States will go to war and what the outcome will be is growing. 4- A soft labor market. The median length of unemployment is at its highest in eight years. 5- Health care costs are rising at the fastest rate in a decade.

Reasons to see it half full 1-Home values continue to rise. Prices were up 7% in January from the previous year. 2-Interest rates are at 41-year-lows, making borrowing costs cheaper. 3-Inflation, outside of energy and food, is the lowest in decades. 4-Debt as a percentage of total family assets is the lowest since at least 1989, when records began. 5-Productivity is expected to continue to rise, leading to an improvement in living standards.

Any big pullback could risk a second recession, because consumer spending, which makes up 70% of the economy, has been the main pillar holding up the fragile recovery.

"Consumers are looking at the big picture, and they're getting scared," says Oscar Gonzalez of John Hancock Financial Services. "The simple fact is they don't have much left to draw upon. Higher gas prices are cutting into disposable income, and most consumers have already taken advantage of low interest rates."

Such concerns were partly allayed by a second report Tuesday that showed home sales rose to a historic level in January. Even the Conference Board report contained signs the strong housing market could last a bit longer. It found the number of people planning to buy a house in the next six months had risen, despite growing financial unease.

Economists caution that consumer spending is more closely tied to real income, which has risen in recent months, than to confidence numbers that can fluctuate widely. And they point to positive signs for economic growth this year: tame inflation, rising productivity and low interest rates.

Clearly, not everyone is running for the hills. William Eure, 72, a retired physician in Hattiesburg, Miss., says he's been down this road before and is confident the economy will rebound.

"We take two or three cruises a year and we're about to buy a new minivan," he says. "We're not doing anything differently than we've ever done."

Jobs hard to get

Still, many called the report cause for fresh concern, especially because more than 30% of the people responding said jobs were hard to get — a nine-year high — and only 15% expected their incomes to rise in the next six months, an all-time low. Those negative expectations are the most likely to translate into a drop in consumer spending.

Gina Martin, economist at Wachovia, says her firm expects consumer spending to fall this spring.

Paul Tennis, 43, of Pepperell, Mass., says he's worried about his job after seeing his co-workers laid off. "Certainly with the impending war, it doesn't seem like business is picking up," he says.

Tennis' car is 15 years old, but he says he won't replace it until he feels more secure about his job. He plans to save this year's tax refund.

The report also came amid signs consumers were pulling back from both the stock market and local stores and were being hit hard by a spike in gas prices that has many paying more than $2 a gallon.

Robert Mang is CEO of Galyan's, an Indiana-based sporting-goods chain with 34 stores in 17 states. He has noticed a drop in sales of big-ticket items. The $149 bicycles are selling well, but not the high-end bicycles that climb to $4,000.

"Traffic is up, but spending is down," Mang says.

The Conference Board figures, based on a survey of 5,000 people, showed the third monthly decline in a row. They were roughly in line with a University of Michigan consumer survey showing confidence at a nine-year low.

More than 30% of respondents called current conditions bad, up from 27% in January. Nearly 20% expect things to get worse in the next six months, up from 14%. While the number planning to buy houses increased, the number ready to buy a car fell to the lowest since October 1996. The decline in confidence was most pronounced among the middle-aged and better-off.

The news rattled Wall Street initially, but stocks recovered. The Dow Jones industrial average finished up 51 points to 7910, after plunging in early trading. The index is down 5.2% this year.

Professional investors acknowledge that corporate earnings and revenue growth would likely take a hit if Americans stopped spending. But many traders and strategists also view consumers' increasingly downbeat outlook as a signal that uncertainty and fear have reached extreme levels — a sign things are likely to get better.

"When confidence drops this low, this fast, it suggests that the next major move will be an improvement in conditions," says Ed Yardeni, chief investment strategist at Prudential Financial.

In the previous seven instances in which the Conference Board's indicator came in 10 points below the previous month's reading, the Dow was up an average 2.1% five days after the report's release, according to MarketHistory.com.

Keys to consumer spending

Economists have been predicting a sharp decline in consumer spending for months. So far, Americans have defied expectations and kept their pocketbooks open.

Looking ahead, analysts say several factors will determine Americans' shopping patterns:

• War. There is concern about the tangible effects of a war — rising energy prices and stock fluctuations — and more intangible fears that could further undermine confidence. Along with the Conference Board findings, a poll by the Pew Research Center for the People and the Press showed public confidence in the White House's handling of the war and the economy is declining, with few paying attention to Bush's tax-cut plan. Three in 10 Americans said they did not have enough money to pay bills and make ends meet.
• Energy. Concerns that a war with Iraq will disrupt oil supplies, a strike in key oil-exporter Venezuela and already low inventories have put pressure on energy markets. Gasoline prices are up nearly 50% from a year ago and are above $2 a gallon in many markets across the USA. Gasoline prices are something people see every day as they drive to and from work and are considered to have a big impact on consumers' psyches.

"The most visible price in America is the price of gasoline," says Daniel Yergin, chairman of Cambridge Energy Research Associates and author of The Prize: The Epic Quest for Oil, Money & Power, a Pulitzer Prize-winning book on the oil industry. "That's a big weight on the economy and on those confidence factors."

The cost of heating homes has also risen. The price of natural gas, which 55% of homeowners use to heat their houses, has more than quadrupled in the past year.

• Employment and income. While the 5.7% unemployment rate is low by historical standards, the median length of unemployment is now at an eight-year high of 9.8 weeks, and many discouraged workers have dropped out of the job market altogether. A survey released earlier this week by Manpower said employers expected hiring to slow this spring, the first decline in more than a year. There have been some signs that income growth is slowing, but it remains healthy.
• Stock market. Investor optimism in February slumped to an all-time low amid concerns about pocketbook issues, according to UBS' index of investor optimism.

"The investor is telling us that until they see this economic recovery is for real, they are not jumping into this market," says Tracy Eichler, investment strategist at UBS Paine Webber.

The average stock mutual fund has fallen 10.3% a year the past three years, according to fund-tracker Morningstar. Most fund shareholders held on during the long decline, but they are starting to flee now. Investors pulled $7.7 billion from stock funds in December. More surprising, they yanked an estimated $1 billion from stock funds in January, traditionally the month when funds see the most new money. It's the first January since 1990 that money has left stock funds.

Contributing: Sandra Block, Del Jones, Adam Shell, John Waggoner

www.nytimes.com February 26, 2003 By JUAN FORERO

CARACAS, Venezuela — Once more, tankers are setting sail loaded with crude bound for the United States, while government planners busily rebuild and reorganize the state-owned Petróleos de Venezuela, pondering how to function with 40 percent fewer workers.

Oil, the lifeblood of Venezuela, is running again after a paralyzing national strike, with production now topping two million barrels a day, say officials of the $46-billion-a-year company. They predict that Venezuela's oil industry, with a leaner government-run company leading the way, will soon churn out 3.1 million barrels daily, matching the pre-strike level.

"We are getting close to normal," said Enrique Salazar, a loading master on the Caribbean coast, peering from a control room as a tanker, the Morichal, took on 25,000 barrels an hour.

But oil analysts and economists say the government's rosy picture hides a painful truth about a 27-year-old company that was born when Venezuela nationalized oil production and quickly became one of Latin America's more highly regarded multinationals.

Petróleos de Venezuela has lost $4 billion in exports and nearly 16,000 workers, fired by the government for taking part in a walkout aimed at debilitating President Hugo Chávez's left-leaning government. That financial blow and the loss of workers with, on average, 17 years of experience could permanently hobble the company, keeping it from assuming its role as a leading world oil provider, analysts here and abroad say.

"It will not be the company it once was," said Mazhar al-Shereidah, an oil economist in Caracas who helped write oil regulations for the Chávez government. "For a country that depends on petroleum, now more than ever, the challenges are too great. You have to pray for Venezuela."

The dire predictions, if true, would indeed be disastrous for this country of 24 million, which depends on oil for half of government revenues and 80 percent of exports. It would also leave the United States — which has counted on Venezuelan oil for decades — without one of its most reliable suppliers as a possible war with oil-rich Iraq promises to batter energy markets.

The obstacles are daunting after the strike, which started to fizzle in February after two months. A lack of maintenance has caused sand to build up in the gelatinous deposits and the pressure to drop, making some fields worthless and threatening to cut production capacity by 300,000 or more barrels a day. And perhaps most troubling is that no one knows what Mr. Chávez's government has in store, though it has promised a wholesale revamping of what was once the world's second-largest oil company.

Reports from international analysts are blistering. UBS Warburg predicts that oil's contribution to gross domestic product will fall 22 percent in 2003, with Venezuela facing "a fiscal crisis of major proportions." Fitch Ratings says Venezuela's "image as a reliable crude oil supplier has been undermined" and will he hard to recover.

Analysts say the lack of technical expertise, combined with the financial straits, means that Petróleos de Venezuela will be unable, in the short term, to reach production levels of the prestrike days, when Venezuela was the world's fifth-largest oil exporter. Most recent production has been in fields that were easiest to restart, leading independent analysts to predict that Venezuela will, at best, produce 2.3 million barrels daily by year-end.

"We believe the company's role in Venezuela society has been permanently altered," a recent Deutsche Bank report said. Assuming average daily production of 1.7 million barrels for 2003, the bank estimated that oil revenue would reach only $14.1 billion, down nearly 50 percent from 2001.

The government is already preparing for the worst. The 2003 budget for the oil company was cut by $2.7 billion, to about $6 billion, while the income the government draws from oil is forecast by UBS Warburg to fall from $11.5 billion in 2002 to as little as $5 billion in 2003. The drop will make it especially difficult to raise the $5 billion the company would have spent to keep production steady.

Alí Rodríguez, the former leftist guerrilla turned president of Petróleos de Venezuela, does not gloss over the obstacles. But in an interview, Mr. Rodríguez said the doomsday predictions originated with dissident executives who hoped to undermine international confidence in the oil company to weaken Mr. Chávez.

He predicted that through sharp budget and personnel cuts, the company would reach 3.1 million barrels a day. And "with its resources," he said, "it is perfectly possible that it will even surpass that level."

To be sure, the Petróleos de Venezuela now emerging will be a far different company, in both its management and philosophy.

Gone will be the highly autonomous octopus that Mr. Rodríguez said functioned with great independence from the state, controlling revenues and influencing oil policies. The new company, taking advantage of some of the world's largest oil deposits outside the Middle East, "must give maximum contribution to the nonpetroleum sector, which is the majority of the people," Mr. Rodríguez said.

Still, even inside the gleaming office tower in Caracas where the company is based, the short-term outlook seems dismal as managers pore over financial statements.

"There is no investment, so there is no doubt that the company at this moment is very debilitated," Bernard Mommer, a close adviser to Mr. Rodríguez who is helping guide the restructuring, said in an interview. "Up ahead, we are going to have problems like how to recover the quality of the company."

Venezuela will benefit little from the higher world oil prices projected in coming months, since production capacity remains limited. By the time Petróleos de Venezuela is producing close to three million barrels daily — if it ever does — prices are likely to have stabilized, analysts say.

In the meantime, Mr. Rodríguez and his managers are busy splitting the company into three divisions: a natural gas branch to develop the largest deposits in Latin America, and companies in the east and west intended to make obsolete the executive offices in Caracas, where antigovernment activities percolated.

Venezuela may also unload foreign assets, like refineries in the United States that operate under the Citgo chain, which is wholly owned by Petróleos de Venezuela, and other installations in Europe and the Caribbean.

Publicly, officials deny the companies are for sale. But Mr. Mommer said Citgo remained overly expensive while providing scant returns.

"The sophisticated part of our business, refining, that's not our business," Mr. Mommer said. "Exploration and production, that is where the big money is."

Such a sale would "dismember" the company, warned José Toro Hardy, an influential former board member, because Citgo refineries are specially outfitted to process Venezuela's particularly gummy brand of heavy crude.

"There are few refineries in the world that can refine" this crude, Mr. Toro Hardy explained. "Without Citgo, Venezuela's heavy oil would lose value."

Oil analysts also warn that the company will be debilitated for years from the loss of experienced workers. Executives, office workers, engineers and highly trained technicians joined the walkout and, in some cases, damaged computers and software and stole files to hinder reactivation efforts.

Mr. Chávez, who has referred to the employees as traitors and fascists, has promised that they will not be rehired.

But already, oil analysts say, the shortage of experienced workers is being felt in every corner of the company. In the patents and technology department, which develops technology for exploration and refining, 800 were fired. The department that trains executives has lost hundreds, as has the crucial commercialization department, which contracts with oil purchasers.

"Even if you replace the bodies, you don't replace institutional memories," said Larry Goldstein, president of the Petroleum Industry Research Foundation, an industry-supported analysis group in New York. "It's a hidden loss. You can't touch it or taste it, but it's there."