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New homes and consumer confidence plunge Original Source Link: (May no longer be active)
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U.S. Economy: Consumer Confidence, Home Sales Plunge (Update4)
Sept. 27 (Bloomberg) -- U.S. consumer confidence fell by the most in 15 years after Hurricane Katrina devastated the Gulf Coast and pushed gasoline prices to a record this month.
The consumer confidence index dropped to 86.6, the lowest in two years, from 105.5 in August, the New York-based Conference Board research group said today. New home sales sold in August at the slowest pace since November, falling 9.9 percent to a 1.237 million annual rate, the Commerce Department said in Washington.
``We may now see a pullback in spending,'' said Quincy Krosby, who helps oversee $293 billion in assets as chief investment strategist for The Hartford in Hartford, Connecticut. ``This winter and this Christmas shopping season are going to be the test case, and we're going to see if this is the tipping point for the consumer.''
Federal Reserve Chairman Alan Greenspan said yesterday a marked slowdown in the housing market, if one develops, may result in an ``adjustment'' in spending by consumers. Higher energy costs are also leaving Americans less to spend on other goods, hurting sales at companies such as Avon Products Inc.
The economy will see a ``significant dip'' in growth through the rest of the year and central bankers won't allow inflation to reach ``unacceptable'' levels as oil prices surge, Fed Bank of San Francisco Janet Yellen said today in a speech to members of the British Parliament at a conference in London.
Both the confidence and home-sales figures trailed median forecasts in Bloomberg News surveys. U.S. Treasury notes fell for a fourth straight day, pushing the yield on the benchmark 10-year note to 4.31 percent at 1 p.m. from 4.30 percent yesterday.
Expectations
While a report yesterday showed near-record sales of existing homes in August, new homes may be more of a leading indicator because they count purchases when contracts are signed, not when transactions close. The average price of a new home rose last month to $220,300 from $215,000, today's data showed.
The confidence index was forecast to fall to 95 from 105.6 previously reported for August, based on a Bloomberg News survey of 62 economists. New homes were predicted to sell at a 1.35 million annual rate from the 1.41 million previously reported for July. July's rate was revised today to 1.373 million.
``It's important to stay focused on the interplay between the consumer and the overextended housing market and sharp increases in energy prices,'' said Stephen Roach, chief global economist at Morgan Stanley in New York, in an interview. ``That will be key as to whether or not the U.S. economy will sustain itself in 2006.''
Confidence Drops
The decline in confidence was the biggest since October 1990, when oil prices were rising after Iraq invaded Kuwait and the U.S. was preparing for war. The Conference Board's mail-in survey of 5,000 households was completed Sept. 20, after Katrina damaged drilling rigs and curtailed fuel shipments and pushed up energy prices. The survey was ending as Hurricane Rita crossed the Florida Straits and headed for the Gulf Coast.
Regular-grade gasoline, averaged nationwide, touched a record $3.057 a gallon on Sept. 2, according to the AAA, the nation's largest motoring organization. While the average pump price fell to $2.755 by Sept. 22, it was still 48 percent higher than a year ago.
``The increase in gasoline prices and the prospect of a long, expensive winter is 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 U.S.
Jobs and Inflation
The percentage of consumers that saw jobs as hard to get rose to 25.4 percent from 23.1 percent. The percentage who saw jobs as plentiful fell to 20.1 percent, compared with 23.6 percent in August.
The component of the index that tracks consumers' expectations for the next six months dropped to 71.7 from 93.3, also the biggest decline since 1990. A gauge of optimism about the present situation also fell, to 108.9 from 123.8.
``The destruction wrought by Katrina and Rita may reduce growth somewhat in the short run, but the longer-term growth trajectory remains in place,'' Ben Bernanke, chairman of the White House Council of Economic Advisers, said in a speech in Chicago to the National Association for Business Economics.
The storm likely will trim growth by 0.4 percent percentage point in the third quarter, to a 3.5 percent annual pace, according to 43 economists surveyed by the National Association for Business Economics.
``It will be a few more weeks before we get a clear idea of the costs of these disasters,'' said James Heckman, professor of economics at the University of Chicago and a Nobel Prize winner in 2000, in an interview.
Home Purchases
The proportion of consumers planning to buy a home in the next six months held at 3.5 percent, according to today's survey. The proportion of people expecting to buy a car in the next six months fell to 5.8 percent from 6.2 percent.
Sales of new homes may have plateaued and will slow in 2006 after setting a record this year, economists said.
``It's the early signs of some cooling in this super-heated market,'' David Resler, chief economist at Nomura Securities International Inc. in New York said. ``Fewer people qualify for loans and sales at these prices.''
The Federal Reserve raised its benchmark U.S. interest rate a quarter-point to 3.75 percent last week, saying the U.S. faces only a near-term setback from Katrina instead of a ``persistent threat.'' The increase suggested the Fed is more concerned about inflation than slowing growth.
Last Updated: September 27, 2005 13:09 EDT
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