Advertisement

Consumer Sentiment Shaken by Katrina

Share
From Reuters

U.S. consumer confidence plummeted to a 13-year low in early September, battered by record-high gasoline prices and the full force of Hurricane Katrina, a report showed Friday.

Separate data showed the U.S. current account deficit, the broadest measure of U.S. trade with the rest of the world, narrowed in the second quarter but remained at levels seen as unsustainable over the long term.

The University of Michigan’s closely watched consumer sentiment index fell to 76.9 in September from 89.1 in August, far below Wall Street forecasts and the 81.8 hit after the Sept. 11, 2001, terrorist attacks on New York and Washington.

Advertisement

The current conditions dropped to the lowest level since December 2003 while the expectations index plummeted to the lowest since February 1992.

“If these declines were part of the normal economic cycle, we would now call for a recession in the United States. But they aren’t; the index is responding to a shock, and we expect it quickly to rebound,” said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

The result was similar to trends in other consumer surveys as well as a string of major polls showing waning support for the Bush administration’s economic policies.

“I think there’s probably also a degree of loss of confidence in the government,” said David Sloan, economist at 4Cast Ltd. in New York.

Analysts said the Michigan index suggested consumers, after months of stoicism in the face of rising gasoline prices, have reached a tipping point. For some Americans, gas prices well over $3 a gallon in some areas threaten the sustainability of the suburban SUV-shopping-mall lifestyle.

Moreover, disturbing images from the aftermath of Hurricane Katrina revealed broad social and economic inequalities in the United States, adding to concern about the nation’s direction.

Advertisement

Analysts note that consumers often sing the blues but rarely cut spending as a result -- the link between sentiment and spending is tenuous. Still, the latest drop in confidence was termed a worry for retailers. “We expect a couple of very rough months for consumer spending,” Shepherdson said.

Also, the Commerce Department said that the U.S. current account deficit narrowed in the second quarter to $195.7 billion, but the previous quarter’s record deficit was revised even higher.

The quarterly shortfall, the second-highest on record, compared with Wall Street forecasts for a deficit of $193 billion. The first-quarter gap was revised to a record $198.7 billion from the initial $195.1-billion deficit.

“Despite the fact that you had a narrowing on the quarter based on the first quarter being revised wider, the outlook really isn’t that positive,” Sophia Drossos, G10 currency strategist at Morgan Stanley in New York.

The deficit partly reflects high levels of U.S. consumption but an extremely low savings rate. Foreign investors are left to finance the gap.

International investors increased their net holdings of U.S. assets by $87.4 billion in July, suggesting that high current-account and budget deficits haven’t dimmed their view of the world’s largest economy.

Advertisement
Advertisement