Key Consumer Confidence Gauge Dives
A leading gauge of U.S. consumer confidence plunged to a 5 1/2-year low Tuesday amid mounting concerns that the Sept. 11 terrorist attacks could drive the economy into a deep recession by causing Americans to rein in their spending.
An index maintained by the Conference Board, a New York business research group, slumped to 97.6 this month from 114 in August. That’s the lowest level since January 1996 and the biggest one-month drop since the lead-up to the Persian Gulf War in October 1990.
The latest reading was based on information collected both before and after the terrorist attacks, and added to the anxiety caused by rising unemployment, falling stock prices and other signs of economic distress. Because part of the survey was done before Sept. 11, there was concern that the index may have further to fall.
The decline was bigger than most analysts had predicted and provided more evidence that the economy may have slipped into a recession--and that a recovery may not begin until sometime next year.
“The results just underscore how much the economy was losing steam even before these attacks,” said Ed McKelvey, senior economist with Goldman, Sachs & Co. in New York. “We were pretty sure it would go down, but it went down a lot more than we expected.”
The stock market seemed to brush off the report. The Dow Jones industrial average rose in the final two hours of trading to finish up 56.11 points at 8,659.97.
However, the market suffered near-record losses last week, in large part because investors expected a stream of unsettling economic numbers in the aftermath of the terrorist assault.
Consumer sentiment is important because spending by Americans makes up two-thirds of U.S. economic activity. If anything, consumer buying has been more important than ever this year because of the steep drop-off in capital investment by U.S. companies. While companies whittled their budgets and announced layoffs throughout the first half of the year, buoyant consumers were widely credited with helping the economy stave off a recession.
Though U.S. economic growth slowed to an almost imperceptible 0.2% in the second quarter, most experts agree it would have slid into negative territory had it not been for consumers.
However, there were signs even before Sept. 11 that consumers were slowly giving way under the weight of layoff announcements.
And many experts now believe that the economy will officially enter a recession during the current quarter. Led by cutbacks at beleaguered airlines, layoff announcements may increase.
“The economy faces tougher times ahead,” said survey director Lynn Franco. “While consumers have managed to keep the U.S. out of a recession for several years now, that soon may no longer be the case.”
The plunge in consumer confidence reinforced the belief among many economists that the Federal Reserve will lower interest rates for a ninth time next week when its policymaking committee meets.
The eighth cut, which scaled back the Fed’s target for short-term interest rates to 3%, came last week before the reopening of the stock market. The market was closed for four days after the terrorist attacks.
Bond yields fell Tuesday amid expectations of another rate cut. The yield on the 10-year Treasury security declined to 4.70% from 4.71% on Monday.
The board’s survey runs contrary to polls taken since Sept. 11 by media organizations that show a boost in confidence as the country unifies against the threat of terrorism. In the surveys by Bloomberg News, ABC News/Money magazine and the Gallup organization, respondents expressed greater confidence in either the U.S. economy or their personal finances than in previous polls.
The Conference Board said its monthly survey of 5,000 households showed that confidence has been undermined by signs of weakening business conditions and a declining job market.
Consumers are pessimistic about what lies ahead, the survey showed. Only 21.1% expected their incomes to rise over the next six months, down from 23.2% in August.
The monthly index reflected concerns about the current economic situation as well as future conditions. The survey’s present situation component fell to 125.2 from 144.5. The expectations portion tumbled to 79.2 from 93.7.
Although several recent indicators have pointed downward, there have been signs of lingering strength in the economy.
The National Assn. of Realtors reported Tuesday that sales of existing homes rose to a record annual rate of 5.5 million in August, a 5.8% increase. In the Western region, which includes California, sales jumped 9.8% to an annual rate of 1.46 million.
The association warned, however, that sales have probably declined in the aftermath of the terrorist attacks, and that a recession appears increasingly likely.
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Bloomberg News was used in compiling this report.
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