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Consumer confidence falls
August 28, 2001: 11:34 a.m. ET

U.S. sentiment index posts unexpected August drop, pointing to weak economy
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NEW YORK (CNNfn) - U.S. consumers lost confidence in August, a leading research firm reported Tuesday, as job cuts during a year-long economic slowdown began to weaken one of the last strong points of the economy.

The Conference Board's index of consumer sentiment fell to 114.3 from a revised 116.3 in July. Economists surveyed by expected the index to rise to 117.5.

"The deteriorating U.S. job market dampened consumer spirits this month," said Lynn Franco, director of the Conference Board's Consumer Research Center, in a written statement. "The nation's employment and unemployment numbers now bear watching, since continued weakness in the job market could translate into slower consumer spending."

U.S. stocks fell sharply after the news, as investors registered their concern about the state of the economy, a day after an unexpectedly bad government report on home sales, which had been another strong point in the economy. Meanwhile, Treasury bonds rose on the hope that the consumer reading would push the Federal Reserve to cut interest rates yet again to fend off a recession.

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The Fed has cut its target for short-term interest rates seven times this year, from 6.5 percent to 3.5 percent, in an effort to keep consumers, who fuel two-thirds of the U.S. economy, spending.

The confidence reading, the lowest since 109.9 in April, will likely be critical to the Fed when it decides whether to cut rates again at or before its next meeting, scheduled for Oct. 2.

"[The index] raises the issue of whether the consumer, which up until now had been hanging in there pretty well, is starting to break up, and I think that is going to prove a critical issue in the next several months," said Anthony Karydakis, senior financial economist with Banc One Chicago.

Economists fear the economy could slip into a recession, defined as two consecutive quarters of negative gross domestic product (GDP), if consumer spending dries up.

The government is scheduled to report its revised estimate of second-quarter GDP Wednesday, and many economists think it could fall from an initial reading of 0.7 percent growth -- its slowest rate of growth in 8 years -- to flat or even in to negative territory.

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The Conference Board's Present Situation Index, which measures consumer views of the economy right now, extended a recent downward trend, falling to 145.8 from 151.3 in July. The Expectations Index, which gauges consumers' outlook for the next six months, edged up to 93.3 in August from 92.9.

"People are telling you they are still somewhat optimistic about the future, but the current environment is lousy," said Joseph Lavorgna, senior U.S. economist at Deutsche Banc Alex. Brown.

Economists had hoped that seven interest-rate cuts, along with the advance payments for 2001 tax credit, commonly called "rebates," would be enough to keep consumer confidence afloat.

But even the resilient U.S. consumer apparently can't ignore hundreds of thousands of job cuts by U.S. businesses during the year-long slowdown that have cut into capital spending and eroded corporate profits and stock prices. graphic

-- from staff and wire reports


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