Washington – Consumer confidence suffered its biggest drop in 15 years in September as Hurricane Katrina made Americans anxious about the rising costs of heating their homes and filling their gas tanks. The decline raised questions about consumer spending for the rest of this year, including the holiday shopping season.
Meanwhile, the government reported today that new home sales plunged in August by the largest amount in nine months, continuing a string of mixed signals about the health of the housing boom.
The Conference Board said its Consumer Confidence Index, compiled from a survey of U.S. households, dropped 18.9 points to 86.6 from a revised reading of 105.5 in August.
That marked the biggest slide since October 1990, when the index fell 23 points to 62.6 in the wake of the recession. The September reading was also the lowest level since October 2003, when it registered 81.7.
Analysts had expected the September reading to be 98.
Wall Street took the news of both reports fairly well. The Dow Jones industrial average, up about 30 points before the index was released, fell into negative territory but was only marginally lower.
The Commerce Department said new home sales fell 9.9 percent last month to a seasonally adjusted annual rate of 1.24 million units. Even with the slowdown, the median sales price rose 2.5 percent from July’s level to $220,300. The bigger-than-projected drop in new home sales could signal that the nation’s red-hot housing market is starting to slow down, but reports so far are mixed.
The drop in consumer confidence, which followed an unexpected gain in August, was more jolting, raising more concerns about shoppers’ ability to spend in the critical fall and holiday seasons with gas prices expected to remain at $3 per gallon. That’s due to tight supplies and the fact it may take weeks to restart refineries that closed due to Hurricane Rita.
Even before Katrina slammed into the Gulf Coast Aug. 29, consumers were struggling to fit higher gasoline prices into their budgets, with that strain showing up in August’s modest retail sales gains. Sales have been disappointing again this month, and analysts are concerned that consumers will further retrench when they start paying home heating bills.
Economists closely track consumer confidence because consumer spending accounts for two-thirds of all U.S. economic activity.
“Today’s numbers show that consumers are not very optimistic about the economy. As a result, we will see consumer spending reduced until we see some relief on energy prices,” said Gary Thayer, chief economist at A.G. Edwards & Sons. He added, “If we don’t get some relief, it looks like it will be a very weak holiday season.” Thayer wasn’t as concerned about home sales report, saying the sector was due for a “cooling off.” However, he doesn’t think the housing market is headed for a bust.
Scott Hoyt, director of consumer economics, at Economy.com, was more upbeat about consumers, warning against reading too much into September’s confidence figures. He noted that the key fundamentals for spending – employment and income – are holding up.
“We need to be careful not to overstate the potential (of consumer confidence) on consumer spending,” he said.
While there have been job losses along the Gulf Coast as a result of Katrina’s fallout, economists predict overall healthy job gains of 169,000 when the Labor Department reports its figures Oct.
7.
Still, how fast consumer sentiment will rebound to the 100 reading seen over the past year remains to be seen.
Lynn Franco, director of The Conference Board’s Consumer Research Center, noted that as rebuilding efforts in the aftermath of Katrina take hold and job growth gains momentum, confidence should return to “more positive levels by year-end or early 2006.” “Historically, shocks have had a short-term impact on consumer confidence,” she said.
One component of the Conference Board report, which examines consumers’ views of the current economic situation, fell to 108.9 from 123.8. Another component, the Expectations Index, which measures consumers’ outlook over the next six months, dropped to 71.7 from 93.3 last month.
The Conference Board index is derived from responses received through Sept. 20 to a survey mailed to 5,000 households in a consumer research panel. The figures released today reflect responses from at least 2,500 households.
