Consumer Confidence in Economy Down

By: Matthew Mogul

Consumer confidence in the economy tumbled more sharply than expected in October, reaching its lowest levels in nearly nine years, a private research firm said Tuesday. Some analysts said the report increases the chances the Federal Reserve will slash interest rates when its board meets next week.

A weak job market, the impending threat of war in Iraq, and a prolonged bear market were the main culprits weighing on consumer sentiment, the Conference Board said. Its Consumer Confidence Index skidded to 79.4 from 93.7 in September.

The fall was the fifth consecutive monthly decline in the index and was much lower than the 90.0 reading economists expected. The index is based on a monthly survey of about 5,000 U.S. households and stood at 100 in its base year, 1985.

Fed policy-makers meet on Nov. 6 and some suspect it will move to cut short-term interest rates for the first time this year.

"I'd say these figures significantly increase the odds of the Fed cutting rates next week", said Mark Vitner, senior economist at Wachovia Securities in Charlotte, NC. "And because there's a lot riding on this holiday season I think they now need to go all the way" and cut by a half-point rather than a quarter-point.

The Fed has left its benchmark overnight borrowing rate at a 40-year low of 1.75% since last December, when it made the last of 11 rate reductions aimed at lifting the country out of recession. This year's recovery, however, has proceeded in fits and starts, stirring talk that more cuts are needed.

The confidence index is widely watched because consumer spending accounts for two-thirds of all economic activity. Still, economists are generally wary of drawing too many conclusions about the direction of the economy from consumer confidence reports, saying instead that what affects the economy is consumer spending, not consumer attitudes.

"The thing to keep in mind here is that consumer confidence... generally lags behind other signs the economy is recovering", said Gary Thayer, chief economist at A.G. Edwards & Sons Inc. in St. Louis.

"Some of the weakness is probably attributed to events that are hopefully resolved, like the sniper shootings and the port closures out west", Thayer added.

Maury N. Harris, chief economist at UBS PaineWebber Inc. agreed, saying: "The survey was taken in the first 17 days of the month... if that survey was given later on it wouldn't have looked so bad."

The report drove prices lower initially on Wall Street although they recovered some ground by the close.

After falling as much as 170 points early in the session, the Dow Jones Industrial Average finished the day up 0.90 at 8,369. The market's broader gauges fell. The Nasdaq composite index lost 1.2%, while the Standard & Poor's 500 index declined 0.9%.

The 14.3-point drop in the confidence index from September to October pushed it past a recent low of 84.9 in November last year, when economic expectations were dampened by a recession and the Sept. 11 terrorist attacks. The last time the index was lower was in November 1993, when it stood at 71.9. Then as now, the economy was recovering from a recession, but the labor market was still shaky.

"Declines like this just don't occur that often", said Wachovia's Vitner.

Consumers saying they expect current conditions to improve in the next half year dropped to 19.0% from 21.6%, while those seeing a deterioration rose to 14.1% from 9.7%.

The percentage of consumers rating current business conditions as "bad" increased to 27.6% from 23.8% last month, while those saying conditions were "good" decreased to 15.6% from 18.5%.

"The outlook for the holiday retail season is now fairly bleak", said Lynn Franco, who heads the Conference Board's Consumer Research Center. "Without the likelihood of a pickup in consumer spending, an already weak economic recovery could weaken further."