U.S. consumer confidence drops by most in 15 years

Hurricane Katrina, soaring gasoline prices land one-two punch

NEW YORK •

Consumer confidence in the United States dropped by the most in 15 years in September after Hurricane Katrina devastated the Gulf Coast and pushed gasoline prices to a record.

The Conference Board’s consumer confidence index fell to 86.6, the lowest since October, 2003, from a revised 105.5 in August, the New York-based research group said yesterday. The index was expected to fall to 95 from 105.6 previously reported for August, based on a Bloomberg News survey of 62 economists.

The plunge in confidence threatens to curtail the consumer spending that makes up 70% of the world’s largest economy, hurting sales at companies including Avon Products Inc. Katrina damaged drilling rigs and curtailed fuel shipments, and companies shut down more energy production in Texas as Hurricane Rita approached last week.

“Soaring energy prices and a duet of hurricanes took a heavy toll,” said Richard DeKaser, chief economist at National City Corp. in Cleveland, who forecast 90.2 for the index. “That will probably take a modest toll on consumer spending in the near term.”

U.S. new home sales last month fell by the most since November, a sign that rising mortgage rates and higher energy costs may be cooling housing demand, a separate report today showed.

New home sales fell 9.9% to a 1.237million annual rate from a revised 1.373million in July, the Commerce Department said. The average price of a new home rose last month to US$220,300 from US$215,000.

Regular-grade gasoline, averaged nationwide, touched a record US$3.057 a gallon on Sept. 2, according to the AAA, the nation’s largest motoring organization. While the average pump price fell to US$2.755 by Sept. 22, it was still 48% higher than a year ago.

The surge in gasoline prices from early August to mid-September took nearly a percentage point out of personal income and is costing households an extra US$60 a month, according to Global Insight Inc. in Lexington, Mass.

“The increase in gasoline prices and the prospect of a long, expensive winter [ are] depressing sentiment,” said Joseph Abate, a senior economist at Lehman Brothers Inc. in New York, before the report.

New York-based Avon Products, the world’s largest direct seller of cosmetics, last week cut its annual profit forecast for the second time in three months, in part because the hurricane and higher fuel costs will hurt demand in the United States.

The Conference Board surveys 5,000 households on general economic conditions, their employment prospects and spending plans. The cutoff date for this month’s survey was Sept. 20.

The percentage of consumers that saw jobs as hard to get rose to 25.4% from 23.1%. The percentage who saw jobs as plentiful fell to 20.1%, compared with 23.6% in August.

The component of the index that tracks consumers’ expectations for the next six months dropped to 71.7, the lowest since March, 2003, from 93.3. A gauge of optimism about the present situation also fell, to 108.9 from 123.8.

Katrina slammed into the Gulf Coast on Aug. 29, killing 1,000 people, flooding most of New Orleans and crippling oil rigs and refineries. The storm displaced more than 1 million people.

Some companies are boosting prices to recoup higher energy costs. DuPont Co., the third-largest U.S. chemical maker, said on Sept. 12 it will raise prices for all its products.

“Ultimately, it will be higher prices for the consumer,” Charles O. Holliday, chief executive of the Wilmington, Del.-based company, said in an interview.

The storm likely will trim growth by 0.4 percentage point in the third quarter, to a 3.5% annual pace, according to 43 economists surveyed by the National Association for Business Economics.

“Higher energy prices could sap some strength from real growth, but sentiment is likely to bounce once Katrina disruptions abate,” said Mike Englund, chief economist at Action Economics LLC in Boulder, Colo.

The proportion of consumers planning to buy a home in the next six months held at 3.5%. The proportion of people expecting to buy a car in the next six months fell to 5.8% from 6.2 %.

The Federal Reserve raised its benchmark U.S. interest rate a quarter-point to 3.75% last week, saying the United States faces only a near-term setback from Katrina instead of a “ persistent threat.”

The 11th straight rate increase suggested the Fed is more concerned about inflation than slowing growth in the wake of the storm.