FinancialAdvisor's College Class (FACC)

[FinancialAdvisor]

U.S. Consumer Confidence Drops By Most in 15 Years (Update2)

U.S. Consumer Confidence Drops By Most in 15 Years

Sept. 27 (Bloomberg) -- Consumer confidence in the U.S. dropped by the most in 15 years in September after Hurricane Katrina devastated the Gulf Coast and pushed gasoline prices to a record.

The Conference Board's consumer confidence index fell to 86.6, the lowest since October 2003, from a revised 105.5 in August, the New York-based research group said today. The index was expected to fall to 95 from 105.6 previously reported for August, based on a Bloomberg News survey of 62 economists.

The plunge in confidence threatens to curtail the consumer spending that makes up 70 percent of the world's largest economy, hurting sales at companies including Avon Products Inc. Katrina damaged drilling rigs and curtailed fuel shipments, and companies shut down more energy production in Texas as Hurricane Rita approached last week.

``We may now see a pullback in spending,'' said Quincy Krosby, who helps oversee $293 billion in assets as chief investment strategist for The Hartford in Hartford, Connecticut. ``This winter and this Christmas shopping season are going to be the test case, and we're going to see if this is the tipping point for the consumer.''

U.S. Treasury notes rose for the first day in four after the report. The yield on the benchmark 10-year note fell 2 basis points to 4.7 percent at 10:19 a.m. in New York. A basis point is 0.01 percentage point. The Standard & Poor's 500 Index fell 0.2 percent to 1213.48, giving up earlier gains.

U.S. new home sales last month fell by the most since November, a sign that rising mortgage rates and higher energy costs may be cooling housing demand, a separate report today showed.

Home Sales

New home sales fell 9.9 percent to a 1.237 million annual rate from a revised 1.373 million in July, the Commerce Department said. The average price of a new home rose last month to $220,300 from $215,000.

Regular-grade gasoline, averaged nationwide, touched a record $3.057 a gallon on Sept. 2, according to the AAA, the nation's largest motoring organization. While the average pump price fell to $2.755 by Sept. 22, it was still 48 percent higher than a year ago.

``The increase in gasoline prices and the prospect of a long, expensive winter is depressing sentiment,'' said Joseph Abate, a senior economist at Lehman Brothers Inc. in New York, before the report.

New York-based Avon Products, the world's largest direct seller of cosmetics, last week cut its annual profit forecast for the second time in three months, in part because the hurricane and higher fuel costs will hurt demand in the U.S.

The Conference Board surveys 5,000 households on general economic conditions, their employment prospects and spending plans. The cutoff date for this month's survey was Sept. 20.

Rising Prices

The percentage of consumers that saw jobs as hard to get rose to 25.4 percent from 23.1 percent. The percentage who saw jobs as plentiful fell to 20.1 percent, compared with 23.6 percent in August.

The component of the index that tracks consumers' expectations for the next six months dropped to 71.7, the lowest since March 2003, from 93.3. A gauge of optimism about the present situation also fell, to 108.9 from 123.8.

Katrina slammed into the Gulf Coast on Aug. 29, killing 1,000 people, flooding most of New Orleans and crippling oil rigs and refineries. The storm displaced more than 1 million people.

Some companies are boosting prices to recoup higher energy costs. DuPont Co., the third-largest U.S. chemical maker, said Sept. 12 it will raise prices for all its products.

``Ultimately, it will be higher prices for the consumer,'' Charles O. Holliday, chief executive of the Wilmington, Delaware-based company, said in an interview.

Interest Rates

The storm likely will trim growth by 0.4 percent percentage point in the third quarter, to a 3.5 percent annual pace, according to 43 economists surveyed by the National Association for Business Economics.

``Higher energy prices could sap some strength from real growth, but sentiment is likely to bounce once Katrina disruptions abate,'' said Mike Englund, chief economist at Action Economics LLC in Boulder, Colorado.

The proportion of consumers planning to buy a home in the next six months held at 3.5 percent. The proportion of people expecting to buy a car in the next six months fell to 5.8 percent from 6.2 percent.

The Federal Reserve raised its benchmark U.S. interest rate a quarter-point to 3.75 percent last week, saying the U.S. faces only a near-term setback from Hurricane Katrina instead of a ``persistent threat.''

The 11th straight rate increase suggested the Fed is more concerned about inflation than slowing growth in the wake of the storm.

To contact the reporter on this story:
Joe Richter in Washington [e-mail].


LINK: http://www.bloomberg.com/apps/news?pid=10000087&sid=aMgZyRaRPGvk&refer=top_world_news