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Consumer setiment drops after katrina Original Source Link: (May no longer be active)
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U.S. Economy: Consumer Sentiment Drops After Katrina (Update3)
Sept. 16 (Bloomberg) -- U.S. consumer confidence fell to the lowest since 1992 after Hurricane Katrina devastated the Gulf Coast and pushed gasoline prices to a record high, raising concern that Americans may curtail spending.
The University of Michigan's preliminary index of consumer sentiment fell to 76.9 this month from 89.1 in August, surpassing even the drop following the 2001 terror attacks. The decline was the biggest since December 1980.
``These are abysmal numbers, suggesting a deeply pessimistic consumer in the first half of September,'' when gasoline prices peaked and officials were predicting as many as 10,000 deaths, said Christopher Low, chief economist at FTN Financial in New York. ``Things still appear grim, but are not nearly as bad as that. We look for some recovery in confidence as early as the final September report.''
The survey reinforced concerns that high gasoline prices may slow consumer spending and hurt sales at retailers such as Wal-Mart Stores Inc. and Best Buy Co. Government reports yesterday showed the hurricane pushed up consumer prices in August, drove manufacturers' costs higher this month and prompted the biggest weekly jump in jobless claims in nine years.
Low's forecast of 78 was the most pessimistic in a Bloomberg News survey of 53 economists, where the median estimate was 85. The preliminary reading is based on a phone survey of about 300 households. The university will release a final report with a sample size of 500 on Sept. 30.
U.S. Treasuries fell as concern about accelerating inflation outweighed the drop in consumer confidence. The yield on the benchmark 10-year note rose 6 basis points, or 0.06 percentage point, to 4.27 percent at 4:14 p.m. in New York.
Market Reaction
The dollar rose against the yen after the other government reports today showed the U.S. current-account deficit narrowed for the first time since 2003 and foreign investors increased their net holdings of U.S. assets by $87.4 billion in July. The current account gap narrowed to $195.7 billion for April through June, down $3 billion from a record in the first quarter.
The Fed is forecast to raise its benchmark interest rate next week for an 11th straight time to 3.75 percent. Economists said policy makers are likely to view the decline as temporary and are more concerned about whether Americans are becoming more pessimistic that inflation will keep accelerating.
Consumers in the university survey this month projected prices will rise 4.6 percent in the next year compared with 3.1 percent expected last month. In the next five years, inflation will rise 3.1 percent, up from 2.8 percent expected in August.
Inflation Expectations
Fed ``officials must be worried by this initial breakdown in inflation expectations and will likely be watching these numbers very closely going forward,'' said Ted Wieseman, an economist at Morgan Stanley in New York.
Economists at Goldman, Sachs & Co., saying Katrina's economic impact won't be as dire as they previously predicted, today forecast the Fed will raise rates by a quarter-point. They had earlier said the Fed would keep rates unchanged.
Katrina has done little to change expectations among economists for further interest-rate increases, according to a survey by the National Association for Business Economics released today that also identified energy costs as the biggest threat to the economy.
Ninety percent of economists surveyed said they expect the Fed to raise borrowing costs more. Among those surveyed after Katrina, 84 percent predicted increases, compared with 97 percent among those who responded before the storm.
Current Conditions
The Michigan survey's current conditions index, which reflects Americans' perception of their financial situation and whether it's a good time to buy big-ticket items, fell to 97.7 from 108.2 in August. The expectations index, based on optimism about the next one to five years, fell to 63.6 from 76.9, the biggest decline since 1990.
``If these declines were part of the normal economic cycle we would now call for a recession in the U.S., but they aren't,'' said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York. ``The index is responding to a shock, and we expect it quickly to rebound.''
The U.S. was just coming out of the 1990-1991 recession the last time the consumer confidence gauge was this low. The 12.2 point decline in the main index matched the drop in December 1980, when annual inflation was exceeding 12 percent, the Fed raised its target rate to 20 percent, and the Iranian hostage crisis was at its peak.
Hurricane's Impact
Hurricane Katrina may cost the economy 400,000 lost jobs and cut economic growth by a percentage point in the second half of the year, according to the Congressional Budget Office. The storm helped push initial claims for unemployment benefits up by 71,000 last week, the most in more than nine years.
Confidence in the president is dropping along expectations about the economy. Public approval of George W. Bush has fallen to the lowest of his presidency, according to a New York Times/CBS poll published yesterday.
The federal government has approved $62.3 billion in aid for the region, and reconstruction in Louisiana, Alabama and Mississippi will eventually generate jobs, economists said.
``Jobs will come down for awhile, there will be slower GDP growth for awhile,'' Treasury Secretary John Snow told about 100 workers at Home Depot Inc.'s headquarters in Atlanta today. ``It is going to hit you.''
Inflation excluding energy and food remains ``well under control'' and the administration will resume cutting the deficit after the Katrina-related government spending surge, Snow said later in an interview. ``We will sustain low inflation.''
Wal-Mart, the world's largest retailer, forecast a sales gain of 2 percent to 4 percent in the five weeks that began Aug. 27. The company said high gasoline prices are cutting into sales.
Retailers
``We are seeing an increasing difference between the first of the month and the end of the month,'' with spending winding down as the month goes along, Wal-Mart Chief Executive H. Lee Scott told analysts in Boston on Sept. 7.
Richfield, Minnesota-based Best Buy, the biggest U.S. electronics retailer, on Sept. 13 shaved a percentage point from its forecast for same-store sales gains this year.
U.S. retail sales fell 2.1 percent in August, the most since November 2001, as auto purchases slumped, the Commerce Department said yesterday. Excluding autos, sales rose 1 percent, twice as much as expected.
Economists cut third-quarter economic growth forecasts after the hurricane. The economy will expand 3.6 percent at an annual rate, according to the median of 57 estimates in a Bloomberg survey conducted Aug. 31 to Sept. 8. A month earlier, economists predicted 4.1 percent growth.
Last Updated: September 16, 2005 16:17 EDT
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