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Consumer confidence drops to two-year low

With Christmas only a month away, American consumers became more pessimistic about the economy in November, sending a widely watched barometer of confidence to the lowest level in two years.
/ Source: The Associated Press

Just when the economy needs them the most, consumers are feeling less confident than they have since hurricanes Katrina and Rita pummeled the Gulf Coast two years ago.

U.S. consumers face a multitude of problems — higher gas prices, a volatile stock market and a slumping housing market — that are fueling worries among retailers of a frugal holiday with only a month left of the critical Christmas shopping season.

On Tuesday, the New York-based Conference Board said that its Consumer Confidence Index dropped to 87.3, marking a four-month slide and down almost 8 points from the revised 95.2 in October.

It was the lowest reading since 85.2 in October 2005 when gas and oil prices soared after the hurricanes flooded New Orleans and shut down a large chunk of the nation’s oil refineries. It also marked the sharpest drop since September 2005 when the index plummeted 18 points from the previous month. Analysts had expected a reading of 91.5 in November.

“Consumers’ apprehension about the short-term outlook is being fueled by volatility in financial markets, rising prices at the pump and the likelihood of larger home heating bills this winter,” said Lynn Franco, director of The Conference Board Consumer Research Center, in a statement.

The Present Situation Index, which measures how shoppers feel now about the economy, fell to 115.4 from 118.0 in October. The Expectations Index, which measures shoppers’ outlook over the next six months, declined to 68.7 from 80.0.

“It doesn’t mean that shoppers are not going to spend. It implies they are going to be cautious,” this holiday season, said Joel L. Naroff, president and chief economist at Naroff Economic Advisors Inc. “To me, it will be a mediocre season, not a terrible one, but not a good one either.”

Wall Street paid little attention to the consumer confidence report, rebounding modestly Tuesday after the Abu Dhabi Investment Authority said it will invest $7.5 billion in Citigroup Inc. — a vote of confidence for the nation’s largest bank, which has struggled with heavy losses amid the ongoing mortgage crisis.

The Dow rose 220.45, or 1.73 percent, to 12,963.89.

For retailers, the downbeat report on consumer confidence further fueled concern that the holiday shopping season will be weak. Retailers struggled with disappointing sales this past fall, and while many retailers were encouraged by better-than-expected turnout for the official start of the holiday shopping season, it was the fat discounts that lured consumers in.

According to the International Council of Shopping Centers-UBS index, same-store sales rose 2.5 percent for the week ended Saturday, compared to the year-ago period. Same-store sales are sales at stores opened at least a year and are considered a key indicator of a retailer’s health. According to Michael P. Niemira, chief economist at ICSC, “customer traffic was reasonably healthy but consumers were out looking for bargains.”

A better picture of how the Thanksgiving weekend fared will be learned on Dec. 6. when the nation’s retailers report same-store results for November.

The big worry is that shoppers will take their time returning to the stores this holiday season amid worries that higher gas, an escalating credit crisis and a slumping housing market could push the economy into a recession.

With consumer spending accounting for two-thirds of U.S. economic activity, any further dropoff of consumer spending only increases the risks of a recession.

A report, released Tuesday, on home prices offered another sign that the housing slump is far from over. According to S&P/Case-Shiller index, U.S. home prices fell 4.5 percent in the third quarter from a year earlier, the sharpest drop since Standard & Poor’s began its nationwide housing index in 1987. The index also showed that prices declined 1.7 percent from the previous three-month period, the largest quarter-to-quarter decrease in the index’s history.

One bright spot has been the labor market, which has held steady, but the latest report shows growing concern about job security. Earlier this month, the Labor Department reported that the nation’s payrolls grew by a net 166,000 in October, the most in five months. The unemployment rate remained at 4.7 percent.

The consumer confidence report — derived from 5,000 responses through Nov. 19 — showed that shoppers’ outlook for the labor market was more pessimistic. The percent of consumers expecting more jobs in the months ahead fell to 10.8 percent from 13.3 percent, while those anticipating fewer jobs rose to 23.1 percent from 20.2 percent. The proportion of consumers expecting their incomes to decrease in the months ahead rose to 11.0 percent from 9.1 percent.