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The Honolulu Advertiser
Posted on: Wednesday, August 30, 2006

Consumer faith in economy plunges

By Madlen Read
Associated Press

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NEW YORK — Americans' faith in the economy tumbled in August to a nine-month low, which could translate to tightened purse strings if job growth stumbles or fuel costs rebound.

Job-related worries were the big reason consumer confidence fell more than expected this month to its lowest level since November. In July, unemployment rose to a five-month high of 4.8 percent.

But analysts expect job creation and personal spending for August to come in higher in reports due later this week, and pump prices have fallen more than 5 percent over the past month — providing some relief in people's travel budgets.

Furthermore, consumers surveyed reported small increases in their plans to buy homes and major appliances, despite their dwindling confidence.

"What people say and what people do don't always correspond," said Stuart G. Hoffman, chief economist for the PNC Financial Services Group in Pittsburgh. "We don't know yet if this confidence number drop will hurt the back-to-school selling season."

The Conference Board, a New York-based research group, said yesterday its confidence index fell to a reading of 99.6, down from 107.0 in July. The index was lower than analysts' expectation of 102.5.

The last time the index fell below 100 was in November, which saw a reading of 98.3.

There are still more consumers who feel business and labor conditions are favorable than unfavorable, but the gap is closing, economists noted.

Data on personal spending for July will be released tomorrow. Analysts are expecting an increase from June.

Consumer confidence has been volatile this year, with rising interest rates, high energy prices and fighting in the Middle East weighing on Americans' view of how the U.S. economy is doing.

The thwarted terror threat in London earlier this month also worried U.S. consumers, said Hoffman.

Lynn Franco, director of the Conference Board's consumer research center, said this month's drop — the largest one-month decline since Hurricane Katrina ravaged the Gulf Coast a year ago — means expectations of slower growth in the coming months.

"You've got a deterioration in business conditions coupled with lackluster job growth," Franco said.

On Aug. 4, the Labor Department said the nation's unemployment rate rose to a five-month high of 4.8 percent in July, up from 4.6 percent in June. However, analysts are expecting the Labor Department to report on Friday a bigger rise in job growth for August than in July, and for the unemployment rate to edge lower to 4.7 percent.

Americans' sentiment about the labor market worsened in August, with consumers saying jobs are "plentiful" decreasing to 24.4 percent in August from 28.6 percent in July, and those saying jobs are "hard to get" increasing to 21.1 percent from 19.6 percent.

The report — derived from responses through Aug. 22 to a survey mailed to 5,000 households — also showed that consumers' view of labor market prospects weakened. Those expecting more jobs to open up in the next few months fell to 14.0 percent in August from 14.3 in July, and those expecting fewer jobs rose to 18.3 percent from 16.5 percent.

Consumers expecting a raise in the months ahead slipped to 17.7 percent in August from 18.3 percent in July.

Inflation worries remain high as well, even with the recent retreat in gasoline prices.