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Consumer confidence shaken
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October 30, 2001: 1:29 p.m. ET
A new survey finds Americans were less confident in the economy in October.
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NEW YORK (CNNmoney) - A key gauge of consumer confidence in the U.S. economy plunged in October, according to a survey released Tuesday, showing Americans were much more negatively affected by the Sept. 11 terrorist attacks than analysts expected.
The Conference Board said its index of consumer sentiment fell in October to 85.5, its lowest level since February 1994, from a revised 97.0 in September. Economists surveyed by Briefing.com forecast a reading of 95.9.
"The economic outlook is becoming increasingly pessimistic, with consumer sentiment continuing to fall," said Lynn Franco, director of the Conference Board's Consumer Research Center.
The survey's Present Situation Index, a measure of how consumers feel about the current state of the economy, dove to 107.6 from 125.4 in September. The Expectations Index, a widely-watched barometer of future economic activity, dropped to 70.8 from 78.1.
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CNNfn's Kathleen Hays takes a closer look at consumer confidence numbers.
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"Widespread layoffs and rising unemployment do not signal a rebound in confidence anytime soon," Franco added. "With the holiday season quickly approaching, there is little positive stimuli on the horizon."
U.S. stock prices fell sharply after the news, while Treasury bond prices rose.
Consumer confidence was falling even before the terrorist attacks of Sept. 11, driven down by a year-long slowdown in the U.S. economy and hundreds of thousands of job cuts. In the Conference Board's first report after the attacks - which only partially reflected their impact - confidence posted its biggest one-month drop since the last recession.
To keep consumers - who fuel two-thirds of the U.S. economy - spending and a recession at bay, the Federal Reserve has cut its target for short-term interest rates nine times this year, twice since Sept. 11, to the lowest levels since 1962. It is widely expected to cut rates again after its next policy meeting, scheduled for Nov. 6.
Still, most economists expect a recession, commonly defined as two consecutive quarters of shrinking gross domestic product (GDP), to follow the attacks. The Commerce Department is scheduled to report its first estimate of third-quarter GDP on Wednesday, and economists surveyed by Briefing.com expect it to have shrunk at an annual rate of 1 percent.
"It shows that consumers are feeling poorly about the economy, similar to what we've see in other recessions," said Gary Thayer, chief economist at A.G. Edwards & Sons. "Confidence is not as low as it was in the recessions of the early 1990s and early 1980s, but it is dropping in response to the worsening employment situation and the concern about the terrorism threat."
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Consumers rating current business conditions as "bad" rose to 20.6 percent in October from 18.3 percent in September, while those who thought conditions were "good" declined to 18.9 percent from 22.3 percent.
The board also said expectations for the next six months continued to deteriorate. The percentage of consumers who think business conditions will worsen rose to 20.3 percent from 15.8 percent, while those expecting fewer jobs climbed to 28.9 percent in October from 22.5 percent in September.
Most economists expect an economic recovery some time in 2002, driven by the aggressive Fed rate cuts and what will likely be a multi-billion-dollar stimulus package from Congress.
What's unpredictable is how well the United States will do in prosecuting the war in Afghanistan and preventing further attacks; success on those fronts would certainly boost consumer confidence.
"As the world comes back to normal and as the Federal Reserve's incredibly large monetary stimulus starts to impact the economy along with fiscal stimulus, moods are likely to recover," said Jeremy Fand, chief foreign exchange strategist at UBS Warburg.
The next economic data to impact consumer confidence are the rate of unemployment and number of job cuts in October, which the Labor Department is due to report Friday. Though unemployment held steady at 4.9 percent in September, nearly 200,000 jobs were cut, and economists surveyed by Briefing.com expect it to rise to 5.2 percent in October.
The next measure of how consumers are feeling will come on Nov. 9, when the University of Michigan releases its preliminary gauge of consumer sentiment for November. Sentiment actually rose a bit in October, according to reports, but it remains to be seen if that was a temporary spike or a genuine rebound.
"If, as expected, the October employment report shows a sharp rise in unemployment and a sharp decline in job growth, it could be a crushing blow to confidence," said Oscar Gonzalez, economist with John Hancock Financial Services. "Having a job is probably the single biggest factor in consumers having confidence." 
- from staff and wire reports
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TAKING THE ECONOMY'S TEMPERATURE
