28 October 2002, 09:10  U.S. Oct. Sentiment Index Falls to 80.6 From 86.1 (Update1)

/www.bloomberg.com/ By Siobhan Hughes
Washington, Oct. 25 (Bloomberg) -- U.S. consumer confidence dropped in October to a nine-year low, a University of Michigan survey showed.
The university's final sentiment index fell to 80.6 from 86.1 in September, people with access to the report said. That compared with a preliminary reading of 80.4 and was the lowest since 1993.
A slow recovery in the job market, a drop in stock prices, a series of sniper killings in Washington and the threat of war in Iraq tamped down on confidence. That may weigh on an economic recovery because confidence is tied to spending, which accounts for two-thirds of the economy.
``With the stock market decline, consumers are finally feeling less secure,'' said Dan Seto, an economist at Sumitomo Life Investment in New York. ``I don't think spending is going to collapse, but consumers will have to be tempted to go to the stores. They will be drawn to discounting.''
Also today, new home sales rose 0.4 percent to a 1.021 million unit annual rate, the Commerce Department reported, while sales of previously owned homes rose 1.9 percent to a 5.4 million annual rate the National Association of Realtors said.
Earlier, the Commerce Department reported orders for durable goods fell 5.9 percent in September.
The increase in home sales and the Michigan index's rise from the preliminary reading pushed stocks higher and bonds down. The Dow Jones Industrial Average rose 23 points, or 0.3 percent at 10:05 a.m. New York Time. The yield on the 4 3/8 percent August 2012 note was little changed at 4.1 percent. A basis point is 0.01 percentage point.
Current Conditions
Tupperware Corp. earlier this week reduced its full-year profit forecast because of slowing demand. Ford Motor Co. Chief Executive William Clay Ford Jr. on Monday said that U.S. industrywide auto sales are ``clearly softer'' this month than in September.
Economists had expected a reading of 81 in the final consumer sentiment index, which is based on a survey of 500 households. The 80.6 reading was still the lowest since a reading of 77.9 in September 1993. Confidence may influence spending, which accounts for two-thirds of the economy.
The current conditions index, which reflects Americans' perception of their financial situation and of whether it's a good time to spend on big-ticket items, fell to 92.4, worse than a previously reported 92.9, from 95.8.
``This index reflects the unemployment picture, and is therefore likely to keep falling as the unemployment rate rises over the next few months,'' said Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd. in Valhalla, New York. ``But it tells us nothing about future spending and is best ignored. The outlook index is what counts.''
Expectations
The expectations index, based on optimism about the next one to five years, fell to 73.1 from 79.9. That was lower than the previously reported 72.4.
Americans have reason to feel worse about their finances. The Standard & Poor's 500 Index has fallen 22 percent so far this year after declines in both 2000 and 2001. Average hourly earnings were 3 percent higher in September than a year earlier, the smallest annual gain since March 1996. Firings keep grabbing headlines. Yesterday, Eastman Kodak Co., the world's largest maker of film, said it would eliminate as many as 1,700 jobs to save money.
The main benefit is that the Federal Reserve has left interest rates at a 41-year low of 1.75 percent since December, which has let consumers refinance their mortgages and switch to low-interest credit cards. During the last week of September, applications to refinance home mortgages surged to a record level, the Mortgage Bankers Association of America said, as the average rate on a 30-year mortgage fell to 5.84 percent, the lowest in at least three decades.
Liam McGee, president of Bank of America Corp.'s consumer banking unit, said earlier this week that the bank sees no signs that consumer spending is likely to weaken. Interest rates will probably remain at four-decade lows at least through the first half of 2003, he said, spurring consumers to keep refinancing their homes and charging on credit cards.
The company, which processes one in five of the nation's debit card transactions, has seen ``no discernible uptick in bankruptcies,'' McGee said. ``Credit quality has been very stable.''
The U.S. economy will slow to a 2.2 percent annual rate this quarter from an expected 3.6 percent pace in the third quarter as consumer spending cools, according to the October Blue Chip Economic Indicators survey. Growth will probably rebound to a 3.1 percent pace in the 2003 first quarter.

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