Confidence Drops Over Concern of Slowing Economy

Rising U.S. consumer pessimism over a slowing economy risks aggravating a downturn, but a strong housing market and stable employment picture suggest that fears of recession are overblown, economic reports showed Thursday.

U.S. consumer confidence sank in December to its lowest level in two years, the Conference Board said in a report indicating that consumers, the largest engine of U.S. economic growth, may curb spending until conditions brighten.

But a separate report showed sales of previously owned homes jumped in November as cheaper mortgage rates enticed consumers to splurge on the average household’s biggest ticket purchase.

In addition, weekly claims for unemployment insurance dropped more than expected in the latest week, giving pause to forecasts of a rapidly deteriorating job market.

“The bottom line with the data flow is the economy is weakening a lot but there is no sign of recession-type conditions,” said Ethan Harris, economist at Lehman Bros.

The Conference Board, a private research group, said its consumer confidence index tumbled for the third straight month to 128.3 in December from a downwardly revised 132.6 in November, slightly below average Wall Street forecasts.

“This latest decline in consumer confidence suggests that consumer spending will cool further as we enter 2001,” said Conference Board chief economist Lynn Franco.

Franco said the overall index was consistent with an economy that is continuing to grow, albeit at a slower pace, but that a sharp erosion in the future “expectations” component signaled darker times ahead.

“If expectations continue on this downward trend, a more severe economic slowdown may be on the horizon,” Franco said.

The index posted its lowest reading since December 1998.

The survey mirrored recent declines in other measures of U.S. consumer sentiment, which found that slumping stock markets, high energy costs and slowing economic growth could take a toll on consumer spending.

The Federal Reserve has cited eroding consumer confidence as one factor behind its decision this month to officially warn that a slowing economy, and not inflation, is the main risk to the economy.

Financial markets widely expect the Fed will slash interest rates at its next policy meeting Jan. 30-31, and speculation has swirled that severe weakness in key economic data or steep stock market losses could prompt rate cuts even sooner.

But the surprisingly resilient housing sector had investors scaling back the chances the Fed would take the rare step of cutting rates before its next meeting.

“I think the chance of a between-meeting movement is pretty low,” said Lehman’s Harris.

The National Assn. of Realtors said the annualized rate of existing home sales picked up by 4.4% in November to 5.22 million from 5 million in October.

Home sales, which hit record levels in 1999, slackened earlier this year but the housing market seems to have perked up lately as mortgage and long-term interest rates have tumbled in line with signs of a slowing economy.

“Home sales were significantly stronger than expected. The consensus was looking for [a] small increase and we got a bigger than expected number,” said Henry Willmore, chief U.S. economist at Barclays Capital Group.

Earlier, the Labor Department said initial U.S. jobless claims fell a steep 23,000 in the latest week, but it cautioned against reading too much into the figure because 18 states had estimated their data because of the Christmas holiday.

First-time claims for state unemployment benefits dropped to 333,000 in the week ended Dec. 23 from a revised 356,000 in the prior week.

The figure was well below the Wall Street forecast for a gentle drop to 351,000.

The closely watched four-week moving average of new jobless claims, which irons out weekly fluctuations to give a better indication of jobless trends, fell to 340,750 in the week ended Dec. 23 from 347,750 in the prior week.

The numbers are consistent with an easing in drum-tight labor markets--the unemployment rate last month edged up to 4.0% from a 30-year low of 3.9%--but the claims figure was well below forecasts for a gentle drop to 351,000.

“The four-week moving average has sharply picked up since April’s 262,750, which was the recent low for the cycle. That tells me the demand for labor is weakening,” said Asha Bangalore, economist at Northern Trust Co. in Chicago.

Lehman’s Harris said the day’s figures drew a picture of an orderly slowdown, not an outright economic slump.

“The data aren’t telling us disaster. They are telling us weakness,” he said.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Consumer Confidence

From a monthly survey of 5,000 U.S. households.

December: 128.3

*

Source: Conference Board (BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Existing-Home Sales

Seasonally adjusted annual rate, in millions of units:

November: 5.22

*

Source: National Assn. of Realtors