Washington, Feb. 25 (Bloomberg) -- Consumer confidence in the U.S. economy unexpectedly slumped this month to the lowest since October 1993 because of worries about war, income growth and a lack of job creation. The Conference Board's consumer confidence index plunged to 64 from 78.8 in January, the New York-based research group said. Except for a 17-point drop the month of the terrorist attacks, this month's 14.8-point decline was the largest since April 1980, when a U.S. mission to rescue American hostages in Iran failed. ``Lackluster job and financial markets, rising fuel costs and the increasing threat of war and terrorism appear to have taken a toll on consumers,'' said Lynn Franco, director of the Conference Board's consumer research center. The ``confidence readings paint a gloomy picture.''
With three straight months of waning optimism and household incomes pinched by the highest gasoline prices since June 2001, companies are using discounts to attract customers. A sustained decline in confidence threatens to weaken consumer spending, which accounts for two-thirds of the economy. So far, people are confident enough to make major purchases. Sales of previously owned homes rose in January to the highest on record, fueled by the lowest mortgage rates since the 1960s. Home resales increased to an annual pace of 6.09 million, the National Association of Realtors said. Economists had expected the consumer sentiment index to fall to 77 this month, based on the median of 62 forecasts in a Bloomberg News survey. The lowest estimate was 74. The Conference Board surveys 5,000 households about general economic conditions, their employment prospects and their spending plans. Research has shown consumer confidence readings correlate more closely with current spending than with future spending. Still, a 1998 Federal Reserve Bank of New York study found ``questions that ask about consumers' perceptions of job availability typically have the most explanatory power for future movements in consumption.''
Market Reaction
Americans were less upbeat in February about their present situation and the future. The percentage of consumers who expect their incomes to increase six months from now fell to the lowest since the Conference Board began keeping records in 1967. U.S. Treasury securities extended gains and stocks slumped after the report suggested the economy is sputtering. The confidence index was the lowest since 60.5 in October 1993. The 3 7/8 percent U.S. Treasury note maturing in 2013 rose almost 1/2 point, pushing down the yield 6 basis points to 3.79 percent. The Dow Jones Industrial Average fell 96 points, or 1.2 percent, while the Standard & Poor's 500 Index dropped 10 points, or 1.2 percent, at 10:38 a.m. New York time.
Expectations
The component of the confidence index that tracks consumers' present situation fell this month to 61.6, the lowest since November 1993, from 75.3 in January. A gauge of consumer expectations for the next six months fell to 65.6, the lowest since February 1992, from 81.1. The percentage expecting increases in incomes six months from now fell to 15.2 percent from 18.4 percent. The percentage of consumers who saw jobs as plentiful dropped to 11.2 percent, the lowest since December 1993, compared with 14.5 percent in January. The percentage that saw jobs as hard to get increased to 30.1 percent from 28.9 percent. Since the recession started in March 2001, the economy has lost 1.66 million jobs. Last month, the unemployment rate fell to 5.7 percent, the first decline in four months, according to the Labor Department. Companies added 143,000 jobs, the most in more than two years. The share of consumers planning to buy a home increased to 3.8 percent from 3.6 percent. The realtors group's home sales report showed housing is ``performing much better than expected,'' said Orawin Velz, a senior economist at Fannie Mae, the No. 1 buyer of U.S. mortgages.
Buying Plans
The percentage planning to buy a major appliance fell to 26.4 percent from 28.2 percent. The percentage expecting to buy a car fell to 6.5 percent from 6.8 percent. Spending may slow as higher fuel costs take a bite out of purchasing power. The prices consumers pay for goods and services rose 0.3 percent in January, led by a 4 percent jump in energy prices, the biggest rise in nine months, the Labor Department reported last week. Retail gasoline prices were up 6.6 percent and heating oil costs jumped 8.6 percent, the biggest increase since August 2000. This month, the average price of a gallon of gasoline rose as high as $1.701, the highest since $1.715 in June 2001, Energy Department figures showed. ``With gas prices likely to go even higher, the tax on consumers will be quite substantial,'' said Gerald Cohen, a senior economist at Merrill Lynch & Co. in New York, before the report.
Energy Costs
An average crude oil price of $33 a barrel in the first six months of the year will lower gross domestic product by 0.4 percentage point in the first three quarters, according to Merrill Lynch calculations. Crude oil for April delivery has averaged $33.70 a barrel on the New York Mercantile exchange so far this year. Lower stock prices may also be shaking confidence. The Standard & Poor's 500 index is down 2 percent so far this month, bringing the decline to 5 percent since the first of the year. That's why companies are having to entice consumers with discounts and incentives. Automakers raised U.S. incentives such as rebates and loan discounts by 11 percent to an average of $3,250 in this month's first half from $2,936 in January to help bolster sales, according to industry data. ``The only good news I can see is that consumers are getting a heck of a deal on cars,'' said J.T. Battenberg, chief executive of Delphi Corp., the world's biggest auto-parts maker, in an interview last week. ``It's what's holding the auto industry up to a large degree.'' The economy is expected to expand at a 2.6 percent annual pace this quarter, up from a 0.7 percent rate in the previous three months, according to this month's consensus forecasts of economists surveyed by Blue Chip Economic indicators. Consumer spending is forecast to rise at a 2.4 percent annual rate after rising 1 percent in the last three months of 2002, according to the survey. //www.quote.bloomberg.com