Consumer Confidence Plummets in October
Tue Oct 29, 7:28 PM ET
By Ross Finley
story.news.yahoo.com
NEW YORK (Reuters) - Worries about jobs and a possible U.S. attack on Iraq
pummeled consumer confidence to its lowest level in nine years in October, a
report said on Tuesday, a grim omen for the holiday shopping season ahead.
The shock slump in sentiment rattled financial
markets, stoking speculation the Federal Reserve
could cut interest rates as early
as its meeting next week, which could lower
borrowing costs for everything from car loans to
mortgages.
"A weak labor market, the threat of military action in
Iraq and a prolonged decline in the financial markets
have clearly dampened both consumers' confidence
and their expectations for the near future," said Lynn
Franco, director of The Conference Board's consumer confidence survey.
"The outlook for the holiday retail season is now fairly bleak. Without the
likelihood of a pickup in consumer spending, an already weak economic
recovery could weaken further," Franco added in a release.
The private business research group said its Consumer Confidence Index (news
- web sites) slid to 79.4, a low not seen since November 1993, from 93.7 in
September and far below forecasts for 89.7. Excluding September 2001 this
was the biggest monthly drop since 1990.
Most U.S. retailers book about a quarter of their sales during the
November-December holiday season, and some make the bulk of their profits in
that period. But already many retailers are feeling the pinch on profit margins as
consumers aggressively hunt for bargains.
Evidence that spending may cool even further in the months ahead was seen in
a deterioration in consumers' expectations for income gains and employment --
the prime drivers behind consumers' ability to spend.
While so far in this stage of the recovery there has been scant correlation
between drops in consumer confidence and spending, many analysts were
alarmed by the speed and the magnitude of the erosion in confidence over the
past five months.
"The speed of the deteriorating trend appears ominous," said Ian Morris, chief
economist at HSBC Securities (USA).
CAUTIOUS ALREADY
Weekly reports on chain store sales showed consumers are already growing
cautious.
Retail sales at the nation's chain stores fell 1.9 percent in the week ended Oct.
26 after a 0.6 percent rise in the previous week, the Bank of Tokyo-Mitsubishi
and UBS Warburg said in a joint report. A separate report said sales were up
1.4 percent during the first three weeks of October but annual growth slowed.
U.S. Treasuries rallied after the confidence report was released as investors
piled on bets the Fed will cut rates at its Nov. 6 meeting. The Dow Jones
industrial average (^DJI - news) fell sharply but managed to recoup its losses by
the end of trading to finish nearly unchanged.
"The dominoes are falling one by one and the consumer is just the latest. You
should expect the Fed to cut rates on November 6, probably by 50 basis
points," said Ram Bhagavatula, chief economist at Royal Bank of Scotland
Financial Markets.
Interest rate futures were factoring in about a 90 percent chance the Fed will cut
rates at its policy-setting meeting next Wednesday, compared with less than
50-50 odds priced in the market late last week.
That view has been fueled by weak economic data over the past few days and
reports citing Fed officials who are worried that growth is stumbling. Fed
Chairman Alan Greenspan (news - web sites) in a speech on Tuesday did not
address the data, but he did note that fear of terrorist attacks could undermine
the economy.
But in a conference with reporters after touring a furniture plant in Lexington,
North Carolina, Treasury Secretary Paul O'Neill brushed off concerns that a
slide in confidence could signal weak consumer spending ahead.
"Consumer confidence is a poll, and the only real poll that counts is at the cash
register, and what the cash register is saying is that consumers are still
buying," O'Neill said when asked about the big drop in confidence.
WORRIED ABOUT NOW, AND THEN
The Present Situation Index, a measure of consumers' attitudes about the
economy and their finances right now, plunged to its lowest level since early
1994, to 77.5 in October from 88.5 in September. The Expectations Index, a
gauge of consumers' six-month outlook, fell to 80.7 from 97.2.
Consumer worries about the job market also increased. The jobs-hard-to-get
index rose to its highest level since 1994 in October. A rise in this index often
foreshadows a move up in the jobless rate, which currently stands at 5.6
percent.
The government will release its report on the employment situation for October
on Friday and it is likely to be weak. While consensus forecasts are for a
meager 7,000 net job gain during the month, many economists are expecting
job losses, according to a recent Reuters poll.
The unemployment rate is expected to rise to 5.8 percent.
Consumers' plans to buy a new home or car also fell during the month, raising
concerns about two areas of the economy that have been firing on all cylinders.
Other measures of confidence are likewise caught in a downward spiral. The
University of Michigan's index also hit a nine-year low in October. ABC/Money
Magazine Consumer Index for the week ended Oct. 27 steadied, rising slightly
to minus 21 after tumbling the prior week to minus 23 -- its lowest level since
January 1994.
"Unless the downward momentum is quickly halted, the accumulated loss in
consumer confidence could tip the economy back into recession," Richard
Curtin, director of the University of Michigan survey said on Monday.
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