Sep 28, 2005 5 min read

By Anne D’Innocenzio AP Business Writer

NEW YORK (AP) – Consumer confidence suffered its biggest drop in 15 years in September as Hurricane Katrina made Americans anxious about the rising costs of heating their homes and filling their gas tanks. The decline raised questions about consumer spending for the rest of this year, including the holiday shopping season.

Meanwhile, the government reported Tuesday that new home sales plunged in August by the largest amount in nine months, continuing a string of mixed signals about the health of the housing boom.

The Conference Board said its Consumer Confidence Index, compiled from a survey of U.S. households, dropped 18.9 points to 86.6 from a revised reading of 105.5 in August.

That marked the biggest slide since October 1990, when the index fell 23 points to 62.6 amid the onset of the recession, the buildup to the first Gulf war and a spike in gasoline prices. The September reading was also the lowest level since October 2003, when it registered 81.7.

Analysts had expected the September reading to be 98.

Wall Street took the news of both reports fairly well. The Dow Jones industrial average, up about 30 points before the index was released, fell into negative territory but was only marginally lower.

The Commerce Department said new home sales fell 9.9 percent last month to a seasonally adjusted annual rate of 1.24 million units. Even with the slowdown, the median sales price rose 2.5 percent from July’s level to $220,300. The bigger-than-projected drop in new home sales could signal that the nation’s red-hot housing market is starting to slow down, but reports so far are mixed.

In Washington, Republicans were assessing the political impact of the numbers, particularly the drop in consumer confidence, saying it gives them more reason to worry about next year’s elections.

“These are serious numbers,” said Rep. Tom Cole, R-Okla., a political operative-turned-congressman, referring to the consumer confidence figures. “The question is whether this is a trend or a reaction to Katrina and Rita.”

Cole said he suspects the public’s mood will improve by this time next year when Republicans, who control Congress and the White House, will face the judgment of an uneasy electorate. But in the intervening months, he said, the political consequences of consumer anxiety are “real serious.”

Sen. John McCain, R-Ariz., said Republicans are on the defensive. “Any time our approval ratings go down we have problems. That’s why we’re working on Katrina. That’s why we’re working on Rita,” he said.

The latest AP-Ipsos Poll, conducted Sept. 6-8, showed more Americans are uneasy about President Bush’s handling of the economy. The poll found that 41 percent of respondents approved the president’s handling of the economy, while 57 percent disapproved and 1 percent were not sure. That rating is the lowest since January 2002, when Ipsos began tracking Bush’s approval ratings.

The drop in consumer confidence, which followed an unexpected gain in August, also raised concerns about shoppers’ ability to spend in the critical fall and holiday seasons with gas prices expected to remain at $3 per gallon. That’s due to tight supplies and the fact it may take weeks to restart refineries that closed due to Hurricane Rita.

Even before Katrina slammed into the Gulf Coast Aug. 29, consumers were struggling to fit higher gasoline prices into their budgets, with that strain showing up in August’s modest retail sales gains. Sales have been disappointing again this month, and analysts are concerned that consumers will further retrench when they start paying home heating bills.

Economists closely track consumer confidence because consumer spending accounts for two-thirds of all U.S. economic activity.

“Today’s numbers show that consumers are not very optimistic about the economy. As a result, we will see consumer spending reduced until we see some relief on energy prices,” said Gary Thayer, chief economist at A.G. Edwards & Sons. He added, “If we don’t get some relief, it looks like it will be a very weak holiday season.”

Thayer wasn’t as concerned about home sales report, saying the sector was due for a “cooling off.” However, he doesn’t think the housing market is headed for a bust.

Scott Hoyt, director of consumer economics, at Economy.com, was more upbeat about consumers, warning against reading too much into September’s confidence figures. He noted that the key fundamentals for spending – employment and income – are holding up.

“We need to be careful not to overstate the potential (of consumer confidence) on consumer spending,” he said.

While there have been job losses along the Gulf Coast as a result of Katrina’s fallout, economists predict overall healthy job gains of 169,000 when the Labor Department reports its figures Oct. 7.

Still, how fast consumer sentiment will rebound to the 100 reading seen over the past year remains to be seen.

Lynn Franco, director of The Conference Board’s Consumer Research Center, noted that as rebuilding efforts in the aftermath of Katrina take hold and job growth gains momentum, confidence should return to “more positive levels by year-end or early 2006.”

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AP Political Writer Ron Fournier in Washington contributed to this report.

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On the Net:

www.conferenceboard.org

Commerce Department: www.doc.gov

AP-ES-09-27-05 1620EDT