Consumer Confidence Wanes on the Brink of the Holiday Season

By Jason Simpkins
Associate Editor

Consumer confidence dipped in November, providing the latest bit of conflicting data about the prospects for this year's holiday shopping season.

Spiraling fuel costs and dwindling home prices - which have persisted since summer and which aren't expected to improve for the foreseeable future - were blamed for the disappointing consumer confidence report. Both U.S. Federal Reserve policymakers and private-sector economists have reacted by slashing growth forecasts for this year and next, and the central bank has twice cut short-term interest rates in an effort to reverse the U.S. economy's flagging fortunes.

The Conference Board's confidence index decreased to 87.3 for November, its lowest level in two years. October's confidence reading was revised down to 95.2 from a previously reported 95.6. This comes as no surprise, considering home values dropped 4.5% in the third quarter from a year earlier while oil continues to flirt with the psychologically important $100 a barrel mark. 

"This is a strong indication that consumers are going to pull back sharply and growth is going to be very weak," Nigel Gault, an economist at Global Insight Inc., told Bloomberg News. "The message to the Fed should be that they need to keep cutting rates."

U.S. Federal Reserve Chairman Ben S. Bernanke and central bank policymakers reduced the key Federal Funds Rate by half a percentage point in September and a quarter point in October. The rate now stands at 4.5%. The policymaking Federal Open Market Committee (FOMC) has scheduled its last meeting of the year for Dec. 11.

As far as the shopping season is concerned, the picture has gotten bleaker. Retailers got off to a good start last week. Shoppers spent $10.3 billion on holiday purchases on "Black Friday," the nickname for the day of shopping insanity that follows Thanksgiving Thursday - called that because at one time it was considered the day retailers turned profitable for the year. That outlay was actually 8.3% more than a year earlier, reported ShopperTrak RCT Corp., a Chicago-based research firm.

Those statistics were both ahead of forecasts.

But the subprime mortgage mess and related market conditions were bound to finally influence consumer confidence at some point. Yesterday's consumer confidence report seems to indicate that' finally happened.

"The financial markets are a mess, the housing market is burning down, and gasoline prices are at record highs and you think that consumer confidence could hold up?" asked Joel Naroff, president and chief economist for the Holland, Pa.-based Naroff Economic Advisors. "Not a chance."

But there is still a silver lining to be found. The current indications are that the job market is still reasonably strong. Most consumer confidence gauges reflected concern about the more-distant future, and not necessarily the immediate future.

Will the drop in consumer confidence mean the holiday shopping season will be a disaster?

"Probably not," Naroff said. "People still have their jobs and incomes are rising, so they will spend.  But the concerns about future job prospects could lead to somewhat muted holiday shopping ...With the next FOMC meeting just two weeks away, it would be nice if some signals were being sent. I would like to see another rate cut, but the odds are still against it.  It just means the Fed will have some catching up to do early next year."

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