News > Economy
U.S. confidence tumbles
September 25, 2001: 12:02 p.m. ET

Engine for two-thirds of economy more cautious in September
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NEW YORK (CNNfn) - A key gauge of consumer confidence in the U.S. economy tumbled in September, a survey showed Tuesday, reflecting research mostly completed before the Sept. 11 attacks on New York and Washington.

The Conference Board said its index of consumer sentiment dropped to 97.6 in September from a revised 114.0 in August, the biggest one-month decline since October 1990. Economists surveyed by forecast a reading of 105.

According to the New York-based Conference Board, a business research group, "very few" of the surveys for the report were taken after the terrorist attacks that destroyed the World Trade Center, damaged the Pentagon and killed thousands of people.

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

Separately, the National Association of Realtors (NAR) said existing home sales rose 5.8 percent in August to an annual rate of 5.55 million from a revised rate of 5.2 million in July. Economists surveyed by expected existing home sales to rise to a rate of 5.2 million.

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Though the pace of home sales in August set a record, the NAR said it expects sales to weaken in coming months, as consumers grow more cautious in the wake of the attacks.

"After setting a new record for existing-home sales in August, our internal tracking shows a downturn following the attack on America, and there will be some natural pullback from big-ticket purchases in the months ahead given uncertainty over the future," said David Lereah, NAR's chief economist.

Despite the grim confidence report, U.S. stocks rose in early trading, as many traders expected the news to be even worse, but fell later as fears about the near-term prospects for the economy and corporate profits resurfaced. Treasury bond prices managed modest gains.

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The confidence report is especially critical, since consumer spending fuels two-thirds of the U.S. economy and has been instrumental in keeping a recession at bay. Many economists expect the U.S. to fall into a recession after the attacks, and that seems even likelier, since confidence was worse than expected even before the attacks.

"Clearly, as a betting man, I would have to say the probability of a recession has gone up significantly," said Sung Won Sohn, chief economist at Wells Fargo & Co.

Still, a recession could be avoided, or would at least be very short, if consumer confidence rebounds more quickly than expected, something that will depend in large part on the nature and success of any retaliation for the attacks.

"I don't necessarily think the world's coming to an end," Sohn said. "If we can score some major victories in Afghanistan and get other nations to take care of their own terrorists without involving U.S. troops, I think [confidence] could rebound just like it did after the Gulf War."

To help boost consumer spending, the Federal Reserve has cut its target for short-term interest rates eight times this year. Many economists expect the Fed to cut rates again at or before its next policy meeting, scheduled for Oct. 2.

"This [confidence report] increases the likelihood [rates] will be moved down another [half percentage point] to 2.5 percent," Fed governor Wayne Angell, chief economist at Bear Stearns, told CNNfn's Market Call program. "That's going to increase the likelihood of an improvement in economic conditions next year."

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Hundreds of thousands of job cuts this year, the result of a year-long slowdown in business spending and manufacturing, mostly triggered the slump in confidence, the Conference Board said.

The Conference Board report's Present Situation Index fell to 125.2 from 144.5. The Expectations Index declined to 79.2 from 93.7.

The survey included 5,000 U.S. households, but most of the responses were received before the attacks.

"Very few of the responses will have a post-attack impact," Gail Fosler, chief economist at the Conference Board, told CNN. "In the last two weeks people have ... been very distracted. Filling out response cards to consumer confidence surveys has not really been their number one priority."

Fosler and other economists think a clear picture of the attacks' impact on consumer confidence will not be seen until late October or November.

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Along with consumer spending, the housing market has been one of the few bright spots in the sluggish economy. Steadily low mortgage rates have kept home sales afloat, and the NAR said it expects rates to fall to 6.7 percent in the fourth quarter, a record low.

But the NAR also expects existing home sales to fall below the 5 million rate through the first quarter of 2002, dragged down in the immediate aftermath of the attacks. It revised its outlook for 2001 existing home sales to 5.19 million and its outlook for 2002 to 5.17 million.

The NAR also said it expects gross domestic product (GDP), the broadest measure of economic strength, to slip to negative 0.6 percent in the third quarter and negative 0.2 percent in the fourth quarter before returning to growth in the first quarter of 2002.

Despite the expected first-quarter recovery, the NAR also said it expects the unemployment rate to swell to 5.5 percent by the spring of 2002 from its current level of 4.9 percent. graphic


Survey: nearly half of Americans believe recession likely - Sept. 21, 2001

Recession could follow terror attacks, but it might not last long - Sep. 20, 2001

Fed cuts rates a half percentage point - Sept. 17, 2001

U.S. consumer confidence drops - Aug. 28, 2001


National Association of Realtors

Consumer Confidence Index

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