By  on August 31, 2005

NEW YORK — Although consumer confidence rebounded in August, analysts and economists warned that higher fuel costs will eventually take their toll on shoppers' sentiments as well as their spending habits.

Economists expected the overall index to fall to 100.8 because of rising energy prices, a factor that led to the decline in the University of Michigan consumer sentiment survey on Friday. Instead, the Conference Board's Consumer Confidence Index rose to a reading of 105.6 in August from 103.6 in July. Its components also gained in August, with the Present Situation Index jumping to 123.6 from 119.3 and the Expectations Index inching up to 93.7 from 93.2.

One possible reason for the unexpected bounce is that the survey measured sentiment up to Aug. 23, which is before Hurricane Katrina landed near the Gulf Coastal ports in the surrounding Louisiana area.

The area is home to the Port of New Orleans and the Port of South Louisiana, raising concerns over higher prices for certain commodities and other goods in the aftermath of Katrina. The area houses seafood producers, as well as the storage of green coffee beans from Central and South America, suggesting that consumers will see higher prices in those segments down the road.

Oil platforms and refineries near the Gulf ports were also shut down from the storm. As a result, prices for light sweet crude with an October delivery date briefly hit over $70 a barrel in trading on the New York Mercantile Exchange Tuesday. Heating oil futures, as well as natural gas futures, also climbed higher, hinting that motorists will see an increase in prices at the pump and homeowners could feel the pinch of higher home heating bills this winter.

According to Jim Rice, retail analyst at Susquehanna Financial Group, the rise in fuel costs is "the topic of conversation among vendors" at WWDMAGIC at the Las Vegas Convention Center this week.

"They're trying to figure out what effect the higher energy costs will have on consumers," Rice said. "The vendors I've spoken with here are worried. They don't think we've really seen the impact yet, and some believe Katrina will mean [higher] home heating costs."

Rice also toured the Off-Price Show at the Sands Convention Center and noted, "The vendors there observed that many seem unwilling to buy anything unless they are absolutely positive that an item will sell."The analyst expects consumer confidence to decline in next month's survey, mostly due to higher energy costs. Meanwhile, a sell-side analyst said her retail channel check revealed that some store managers are increasingly noticing a "growing concern among customers over higher gas prices."

Emme Kosloff, analyst at Sanford C. Bernstein, said when breaking out this month's confidence results by income level, "all groups increased from last month, although improvements were larger in the lower-income groups." Yet she pointed out, "Despite the relative improvement in confidence of the lower-income consumer this month, the higher-income groups still maintain a much higher level of confidence on an absolute basis. Additionally, we still expect spending by the lower-end consumer to be constrained by high energy prices."

For the first three weeks of August when the survey was conducted, consumers seemed to have withstood the increase in gas prices. "Consumers appear to be weathering the steady rise in gas prices quite well," concluded Lynn Franco, director of the Board's Consumer Research Center, in a statement.

She said "consumers' confidence in the current state of the economy, and particularly in the labor market, has propelled the Present Situation Index to its highest level in nearly four years." The last high was in September 2001 when the Present Situations Index hit 125.4.

Economist David Rosenberg at Merrill Lynch wrote in his research note, "Even with the significant improvement in the present situations component, we remain convinced that higher energy costs will hurt consumer confidence and spending in the months ahead."

Not everyone believes that consumer sentiment will necessarily decline next month. According to Franco, "Expectations continue to suggest more of the same for the remainder of this year."

Consumers in the survey who claimed that business conditions are "good" increased to 29.8 percent from 28.7 percent, while those who said the conditions are "bad" slipped to 15.1 percent from 16.7 percent.

Consumers who believed jobs were "hard to get" dipped to 23.2 percent from 23.8 percent, while those who felt that jobs were "plentiful" rose to 23.5 percent from 22.9 percent. For the first time since October 2001, consumers claiming jobs are plentiful outnumbered those claiming jobs are hard to get, the Conference Board said.Mark Friedman, a specialty analyst at Merrill Lynch, believed that Katrina would have a limited impact on retailers within his coverage range, mostly because the specialty chains have little exposure in terms of store base in either Louisiana or Mississippi.

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