U.S.: Consumer confidence plunged even before attacks

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Headline: Consumer confidence plunged even before attacks

Source: Knight Ridder Newspapers, 26 September 2001

URL: http://seattletimes.nwsource.com/html/businesstechnology/134346248_consumer26.html

The confidence of American consumers plunged this month, recording its largest decline since shortly after Iraq invaded Kuwait in August 1990.

The Sept. 11 attacks on the World Trade Center and the Pentagon, and the subsequent nose-dive of the major stock indexes, played only small roles in the September consumer-confidence levels. About 85 percent of the households in the report were surveyed before the attacks, Conference Board officials said.

Consumer confidence is crucial, because consumer spending accounts for two-thirds of the U.S. economy. Continued spending by consumers has kept the economy out of recession for much of this year, despite severe cutbacks in business spending. Now, many analysts believe the United States is heading for recession, if it's not already in one.

"We do have to fear fear itself; it matters, it affects consumer spending," said Bill Cheney, chief economist at John Hancock Financial Services. "If people aren't confident, people don't spend, and the economy is damaged by that."

Confidence fell from 114 points in August to 97.6 points in September, according to a closely watched monthly survey of 5,000 households taken by the Conference Board, a private New York-based business research group. Polling took place Sept. 1-21. The 16.4-point drop, the biggest since a 23-point drop in October 1990 from the Persian Gulf crisis, is particularly worrisome because most of the households were surveyed before the terrorist attacks. Many analysts believe the attacks are undermining confidence further.

"As the economic ramifications of Sept. 11 continue to reverberate in the coming weeks and months, and the number of layoffs continue to rise, the economy faces tougher times ahead," said Lynn Franco, director of the Conference Board Consumer Research Center. "While consumers have managed to keep the U.S. out of recession for several years now, that soon may no longer be the case."

President Bush will travel to Chicago tomorrow to meet with airline workers, the White House announced yesterday. He is expected to assure the public it is safe to fly again and to encourage people to resume their normal lives. "It's important to send a signal to America to resume lives, to go to restaurants, to go to movies, to enjoy recreation, to fly, to conduct the business of the nation and the commerce of the nation," White House spokesman Ari Fleischer said.

Retail sales have slumped since the attack, and department stores are bracing for a slower holiday-shopping season. The National Retail Federation, an industry group, has scaled back its projection for retail sales growth in the last three months of the year from 4 percent to 2.2 percent.

Most auto-industry analysts have cut their projections for auto sales both this year and next. The National Association of Realtors projected yesterday that sales of previously owned homes, adjusted for seasonal differences, would drop about 5 percent between now and early next year.

Lawmakers are discussing ways to boost the economy, with Republicans pushing business and capital-gains tax cuts and Democrats supporting financial assistance for low-income and laid-off workers.

No plan is imminent because Federal Reserve Board Chairman Alan Greenspan urged Congress last week to wait for more data on the state of the economy before deciding whether to take action. Greenspan and former Treasury Secretary Robert Rubin, meeting privately yesterday with members of the Senate Finance Committee, did say that any package to stimulate the economy should be swift and sizeable — perhaps as high as $100 billion — but not long-term, according to some participants in the meeting.

Ultimately, two factors will determine how consumer confidence and spending fare: how many people are laid off and how the war on terrorism unfolds. The Conference Board reported that the percentage of consumers claiming jobs were "hard to get" climbed to 18.5 percent in September from 16 percent in August.

The board also said expectations for the next six months were even more pessimistic. The percentage of consumers who think business conditions will worsen rose to 15 percent from 10.7 percent. Those expecting fewer jobs rose to 21.9 percent in September from 17.7 percent in August. The unemployment rate has risen from 4.5 percent in July to 4.9 percent in August, and several analysts expect it to climb to 6 percent by spring.

Since the Sept. 11 attacks, five hard-hit U.S. airlines have announced a total of 73,000 layoffs, and a sixth, Delta Airlines, is to announce layoffs today. Separately, Boeing announced it would cut 30,000 jobs, with the first batch of pink slips going out Oct. 10.

Even people who don't lose their jobs may curtail their spending if they worry they may be next.

The biggest wild card is the expected war on terrorism. Any additional terrorist attacks in the United States would deal a blow to confidence. Any suggestions of a prolonged war with heavy U.S. casualties would add to worries.

Conversely, a quick and successful military foray could boost confidence. In 1990, confidence plummeted after the Iraqi invasion of Kuwait, but it picked up sharply as the United States began bombing raids on Iraq in January 1991.



-- Andre Weltman (aweltman@state.pa.us), September 26, 2001


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