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Consumer confidence lags despite wage growth

Americans’ wages and benefits are rising at the fastest pace in almost two years, but they’re still so worried about jobs that their confidence in the economy waned in October, a report on Tuesday showed.
/ Source: The Associated Press

Americans’ wages and benefits are rising at the fastest pace in almost two years, but they’re still so worried about jobs that their confidence in the economy waned in October, a report on Tuesday showed.

Economists say the reason behind this is that consumers seem obsessed with news about jobs losses at auto plants and other manufacturers, but aren’t seeing the real picture — a steady labor market.

“I think there is enough negative news on the employment front to offset the good stuff that is happening,” said Gary Thayer, chief economist at A.G. Edwards & Sons Inc. in St. Louis. Thayer noted that media reports on outsourcing as well as layoffs among auto workers have distorted consumers’ view on the job market.

According to a report from the Conference Board Tuesday, consumer confidence edged down to 105.4 from a revised 105.9 in September, as job worries offset the benefits of falling gasoline prices. Analysts had expected a reading of 107.8.

The report spooked investors, offsetting better-than-expected quarterly reports from companies like Eastman Kodak Co. In early afternoon trading, the Dow Jones industrial average fell 52.19, or 0.43 percent, to 12,034.31.

In contrast to the consumer confidence data, the Labor Department reported that its Employment Cost Index was up 1 percent in the third quarter, led by a big jump in the cost of employee benefits such as health insurance and pensions.

It was the biggest quarterly increase since a similar 1 percent rise in the second quarter of 2004. The index rose 0.9 percent in the April-June period.

Instead of rising wages, which Americans may be socking away in savings instead of spending, they have been fixated on job cuts in recent months from major household names like chip maker Intel Inc., Goodyear Tire & Rubber Co., Ford Motor Co. and AOL, the Time Warner Inc. online unit formerly known as America Online.

“October’s dip in confidence was prompted by consumers’ mixed assessment of present-day business conditions and a less favorable view of the job market,” said Lynn Franco, director of The Conference Board Consumer Research Center, in a statement. “Consumers’ short-term expectations posted a slight improvement, but the outlook for the labor market remains mixed.”

Franco said October’s readings hinted at moderate economic growth for the rest of the year and into the first few months of 2007.

The private research group’s Present Situation Index, which measures how shoppers feel now about economic conditions, fell to 124.7 from 128.3. The Expectations Index, which measures consumers’ outlook over the next six months, rose to 92.6 from 91.0.

The consumer confidence report — derived from responses through Oct. 24 to a survey mailed to 5,000 households in a consumer research panel — showed that labor market conditions were less positive than in September. Consumers saying jobs are “plentiful” declined to 25.8 percent from 26.2 percent. Those claiming jobs are “hard to get” increased to 22.0 percent from 20.9 percent in September.

The outlook for the labor market, however, was mixed. Those expecting more jobs to become available in the coming months edged up to 15.2 percent from 14.7 percent, while those anticipating fewer jobs also increased to 17.5 percent from 16.5 percent. The proportion of consumers expecting their incomes to increase in the months ahead edged down to 19.6 percent from 20.2 percent in September.

“U.S. labor markets remain historically tight and wage pressures continue to mount, particularly for the most skilled workers. This is something the Fed is keeping its eye on,” said Michael Gregory, an economist with BMO Capital Markets.

Officials at the Federal Reserve are watching closely to see whether wage pressures are beginning to accelerate, a development that would give workers’ more money in their paychecks but could fuel unwanted inflation.

The Fed is hoping that its two-year campaign to slow the economy by raising interest rates will do the trick to send underlying inflation rates lower without slowing growth so much that the economy topples into a recession.

The government reported last week that the overall economy grew at a lackluster annual rate of just 1.6 percent in the July-September period, the slowest pace in three years, reflecting a sharp fall in the once-booming housing industry.

Analysts believe the recent sharp decline in the cost of gasoline and other energy products will give consumers more money to spend on other items and provide a boost to the economy in the final three months of this year.

“Gas prices influence your pocketbook immediately,” said Chris Donnelly, partner of Accenture’s retail practice.