WASHINGTON (AP) - The Commerce Department releases its preliminary report on the gross domestic product for the third quarter at 8:30 a.m. EST today. It is expected to show negative growth, and if fourth quarter GDP growth is also negative, it would meet the traditional definition of a recession. Americans' growing fears about anthrax and job security in the wake of the Sept. 11 terrorist attacks dragged down consumer confidence in October to its lowest level in 7 1/2 years, suggesting the economy will take longer than anticipated to rebound. The New York-based Conference Board said Tuesday that its Consumer Confidence Index plunged to 85.5 from 97, well below the 96 reading analysts had predicted.
"We obviously expected consumer confidence to be shaken, but not this badly," said Oscar Gonzalez, an economist at John Hancock Financial Services in Boston. "This is a very worrisome report." Stocks moved lower on the news. The Dow Jones industrial average closed down 148 points, or 1.6 percent, at 9,122, while the Nasdaq composite index ended 32 points, or 1.9 percent, lower at 1,667. The index, based on a monthly survey of some 5,000 U.S. households, is closely watched because consumer confidence drives consumer spending, which accounts for about two-thirds of the nation's economic activity.
The index compares results to its base year, 1985, when it stood at 100. The October figure is the lowest since February 1994. Consumer spending has been one of the main factors preventing the economy from sliding into recession. But many economists now believe a recession is inevitable after the attacks on the World Trade Center and the Pentagon. Companies have slashed hundreds of thousands of jobs since then. But they had already started trimming payrolls long before the attacks in response to an economic slowdown that weakened earnings and sent stock prices lower.
To help revive the economy, the Federal Reserve has cut interest rates nine times this year, with two reductions coming after the attacks. A 10th cut is expected when policy-makers meet next month. "Consumer spending has slowed over the past year, but overall it has held up reasonably well and it kept the economy afloat," Gonzalez said. "If jobs start disappearing at a rapid pace, we could see a sharper pullback in spending and a downward spiral that not even (Federal Reserve Chairman Alan) Greenspan can stop." Analysts were particularly surprised by the October drop since another gauge of consumer sentiment rose slightly in October. The University of Michigan reported last week that consumer sentiment increased to 82.7 in October from 81.8 in September. "It is a bit at odds," said Scott Brown, chief economist at Raymond James and Associates in St. Petersburg, Fla. "You have to do some sort of psychological weighing of the Michigan numbers and the Conference Board numbers. You can't take one over the other, so take an average."
The business group's survey is more influenced by the changes in the labor market than other reports, said Lynn Franco, director of the Conference Board's Consumer Research Center. Many of the questions the board asks consumers are related to their feelings about their job and income prospects. Another analyst suggested that the stream of reports about anthrax infections, the threat of more terrorist attacks and U.S. military action in Afghanistan are darkening consumers' moods. "My concern is tempered by the fact there's been such incessant media attention to the bombings and the anthrax situation," said Russell Jones, vice president of the retail industry sector at Cap Gemini Ernst & Young.
The Conference Board said consumers' assessment of the current economic climate grew more pessimistic over the past month. Consumers rating current business conditions as bad rose to 20.6 percent in October from 18.3 percent in September, while those who thought conditions were good declined to 18.9 percent from 22.3 percent.
The board also said that expectations for the next six months continued to deteriorate. The percentage of consumers who think business conditions will worsen rose to 20.3 percent from 15.8 percent, while those expecting fewer jobs climbed to 28.9 percent in October from 22.5 percent in September. The Conference Board is a nonprofit research and business group, with more than 2,700 corporate and other members around the world.