By Jennifer Yousfi
Managing Editor
Consumer confidence has reached its lowest level since the post-Katrina period, according to the Reuters/University of Michigan preliminary index of consumer sentiment for November.
At 74.5, the index is at its lowest level since October 2005. This is bad news for Wall Street, which hopes that strong consumer spending will keep the economy from slipping into a recession.
"Rising prices for fuel and food had a devastating impact on household budgets, and falling home prices have diminished consumers' sense of financial security," said Richard Curtin, the director of the Reuters/University of Michigan Surveys of Consumers. The survey is jointly developed by the university and a unit of Reuters Holdings PLC (RTRSY).
Other measures of consumer confidence reported similar results. The Royal Bank of Canada's (RY) RBC Cash [Consumer Attitudes and Spending by Household] Index, also released Friday, was 65.9 for the month. This was a slight increase over October's reading of 64, but not a large enough increase to indicate a substantial upswing in consumer confidence.
Because consumer spending accounts for as much as 70% of all economic activity in the $13 trillion U.S. economy, consumer confidence is a closely watched indicator. High consumer confidence is considered a harbinger of future growth, while declining confidence is viewed as a warning that economic activity is destined to slow. Although the indicator's current level isn't low enough to suggest that a recession is imminent, the Reuters/University of Michigan index has dropped steadily over the past several months.
"This month's decline reflects the fallout from the ongoing housing-market correction, the turmoil in the subprime market, the volatility in the stock market and rising gasoline prices," Steven Wood, president of Insight Economics LLC in Danville, Calif., told Bloomberg News.
The continued tightening of lending standards has reduced the availability of credit, making it tougher for some consumers to finance bigger-ticket purchases. In addition, consumers are trying to pay down debt and build up emergency cash reserves in the event economic conditions only continue to get worse.
"Consumers have become more prudent and more interested in rebuilding their reserve funds as a precaution against any future adverse economic developments," added Curtin, the Reuters survey director.
Several retailers are expected to miss fourth-quarter sales predictions. While Wal-Mart Stores Inc. (WMT) and some other discount firms have lured shoppers with heavy price reductions, such other chains as J.C. Penney Co. Inc. (JCP) and Target Corp. (TGT) posted disappointing November results, Bloomberg reported.
News and Related Story Links:
- Associated Press:
Consumer Confidence Near Two-Year Low.
- Wikipedia:
Hurricane Katrina.