Short-Term Outlook Weighs on Consumer

Consumer confidence fell in November for the fourth consecutive month because of higher costs and uncertainty in the financial markets.

Consumer confidence fell in November for the fourth consecutive month because of higher costs and uncertainty in the financial markets.

The Conference Board Consumer Confidence Index decreased to 87.3 from 95.2 in October. The board’s measure of existing conditions, the Present Situation Index, dropped to 115.4 from 118 in October, and its forecast for the next six months, the Expectations Index, slid to 68.7 from 80.

“This month’s deterioration in confidence was due primarily to the sharp decline in the Expectations Index,” said Lynn Franco, director of The Conference Board Consumer Research Center. “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. In fact, consumers’ inflation expectations have surpassed the spike experienced this spring, and a larger percentage than last month expect stock prices to decline.”

The Present Situation Index, despite losing ground, still suggests the economy is expanding, albeit slowly, Franco said. She said consumers responding to the survey anticipated spending slightly more on gifts this holiday season. The key economic drivers are employment and income, and both the labor market and personal income gains are helping to support spending, Franco said.

But the decline in confidence was “much worse than consensus or [Merrill Lynch’s] forecast,” Merrill Lynch economist David Rosenberg wrote in a research note.

“Confidence has now dropped by almost 24 points since the [near peak] seen in February of last year, as the impact of the energy spike, real estate deflation, financial crisis and job fears weigh on the consumer psyche….This is a type of pullback that is rarely seen outside of an impending recession or a natural disaster,” Rosenberg wrote.

The latest numbers and other data suggest that Federal Reserve policy makers’ next interest rate move on Dec. 11 “may be a more aggressive 50-basis point volley.”

The economist added that the expectations component reported its largest drop since Hurricane Katrina in August 2005.

“This indicator is now at a level that suggests that consumer spending will drop below 1 percent year-over-year, from the current run rate of 3.2 percent, and is consistent with our view that we are edging close to the first consumer recession since 1992,” Rosenberg concluded.

This story first appeared in the November 28, 2007 issue of WWD.  Subscribe Today.

Survey participants who expect business conditions to worsen increased to 16.7 percent from 13.9 percent. Those anticipating business conditions to improve declined to 12.4 percent from 14 percent.

The outlook on the labor front six months from now wasn’t much better, as perceptions took on a more pessimistic tone than last month. The consumers expecting more jobs in the months fell to 10.8 percent from 13.3 percent, according to The Conference Board. Those anticipating fewer jobs rose to 23.1 percent from 20.2 percent. In addition, the proportion of consumers who expect their incomes to fall increased to 11 percent from 9.1 percent.