Economy Sends Off Warning Flares

Tuesday September 25, 6:10 pm ET
By Philana Patterson, AP Business Writer

Consumer Confidence Falls, Home Sales Slump, Auguring Trouble for Holiday Shopping Season

NEW YORK (AP) -- Crumbling consumer confidence and slumping home sales could prove to be a bad combination for retailers, and for the broader economy going into the holiday shopping season, if the labor market contracts further and chokes off spending, economic data showed Tuesday.

But markets took some heart from the warning signs, hoping that they would goad the Federal Reserve to lower interest rates more.

Worries about jobs and the economy flared in September, driving a key barometer of consumer sentiment to its lowest level in nearly two years, a private research group said.

The bad news was compounded by a report from the National Association of Realtors that sales of existing homes declined for a sixth straight month in August, pushing activity to the lowest point in five years. The Realtors showed a rise in median home prices, but a separate report done by S&P/Case-Shiller said home prices fell 3.9 percent in July in its 20-city index. Economists said that decline was probably a better reflection of where the market stands now.

The New York-based Conference Board said its Consumer Confidence Index fell to 99.8, an almost 6-point drop from the revised 105.6 in August. The reading was below the 104.5 that analysts had expected.

It marked its lowest level since a 98.3 reading in November 2005, when gas and oil prices soared after hurricanes Katrina and Rita devastated the Gulf Coast.

"Weaker business conditions combined with a less favorable job market continue to cast a cloud over consumers and heighten their sense of uncertainty and concern," said Lynn Franco, director of The Conference Board Consumer Research Center, in a statement. "Looking ahead, little economic improvement is expected, and with the holiday season around the corner, this is not welcome news."

The Present Situation Index, which measures how shoppers feel now about the economy, declined to 121.7 from 130.1 in August. The Expectations Index, which measures shoppers' outlook over the next six months, declined to 85.2 from 89.2.

Economists closely monitor confidence since consumer spending accounts for two-thirds of U.S. economic activity.

The National Association of Realtors reported Tuesday that sales of existing single-family homes dropped 4.3 percent in August, compared to July. Sales at a seasonally adjusted annual rate dropped to 5.5 million units, the slowest pace since August 2002.

The S&P/Case-Shiller report, also released Tuesday, showed that the decline in U.S. home prices accelerated nationwide in July, posting the steepest drop in 16 years. The index of 10 U.S. cities fell 4.5 percent in July from a year ago. That was the biggest drop since July 1991.

Tuesday's reports showing eroding consumer confidence and a further weakening of housing do not bode well for retailers, who are already bracing for a challenging holiday season. Merchants have seen spending slow all year amid falling home prices and higher gas and food bills. Financial turmoil in August and escalating problems in the credit market have made economists and retailers more nervous about the prospects for a decent holiday shopping season.

Such anxiety is further heightened by a weakened outlook for September sales.

Based on a weak weekly sales report, The International Council of Shopping Centers on Tuesday trimmed its September same-store sales growth estimates to between 2.0 percent to 2.5 percent, from the previous 2.5 percent. Same-store sales are sales at stores open at least a year and are considered a key indicator of a retailer's health.

And two of the nation's leading retailers -- discounter Target Corp. and home improvement merchant Lowe's Cos. -- both tempered their sales forecasts on Monday.

The Washington-based National Retail Federation last week predicted total holiday sales will be up 4.0 percent for the combined November and December period, the slowest growth since a 1.3 percent rise in 2002.

Holiday sales rose 4.6 percent in 2006 and growth has averaged 4.8 percent over the last decade.

"Our forecast has built in weak consumer confidence and the tough housing market," said NRF spokesman Scott Krugman, "If anything, this tells us that our forecast is in the right direction in terms of being so cautious."

While the Fed's decision last week to cut its interest rate by half a point was meant to soften the impact of the housing woes on the overall economy, economists say it won't do much to help spending this holiday.

Wall Street chose to interpret Tuesday's data as possible evidence the Fed could use to support a case for more rate cuts.

The Dow Jones industrial average rose 19.59, or 0.14 percent, to close at 13,778.65, clawing back from a more than 60 point decline after the opening.

Broader stock indicators were mixed. The Standard & Poor's 500 slipped 0.52, or 0.03 percent, to 1,517.21, while the Nasdaq composite rose 15.50, or 0.58 percent, to 2,683.45.

There might be some relief for homeowners with adjustable rate mortgages tied to the prime rate that are poised to reset soon, but it could take six to 12 months for consumers to feel the cumulative effect of the rate cut, said Diane Swonk, chief economist at Mesirow Financial in Chicago.

How well spending holds up hinges on the job market, economists said.

"The question is, do we add jobs?" said Scott Hoyt, director of consumer economics at Moody's Economy.com. "If we do we should see modest growth in consumer spending."

Economists say they'll monitor the labor market, which saw its first drop in job creation in four years in August, for signs of weakness. Economists expect the job market to add 100,000 jobs in September when the Labor department reports its data on Oct. 5. Meanwhile, the unemployment rate is expected to inch up to 4.7 percent from 4.6 percent in July.