Strategy

Consumer Confidence Suffers Huge Blow

Largest single-month decline since October 1990, due to Hurricane Katrina, soaring gasoline prices, and a less optimistic job outlook.
Stephen TaubSeptember 27, 2005

Consumer confidence plummeted to its lowest level in nearly two years and suffered its biggest one-month drop in 15 years, according to the Conference Board.

The 19-point drop in the board’s monthly index — to 86.6 in September from 105.5 in August — was the largest single-month decline in consumer confidence since October 1990, according to the Associated Press. The New York Times noted that the September 11 terrorist attacks generated a 17-point decline.

The board cited Hurricane Katrina, soaring gasoline prices, and a less optimistic job outlook as major influences on its most recent survey, which was based on a sample of 5,000 U.S. households and concluded September 20.

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Separately, the Department of Commerce announced that new-home sales fell 9.9 percent last month, the largest drop in nine months, according to the Associated Press.

These are very significant developments. Consumers are widely believed to account for roughly two-thirds of the economy; if they decide to sit on their wallets, overall growth could fall precipitously, which would relieve much of the economy’s inflationary pressure. This, in turn, might encourage the Federal Reserve to back off from its tightening campaign.

The Conference Board acknowledged that historically, shocks such as the recent hurricanes have had a short-term impact on confidence, especially on consumers’ expectations. Indeed, fuel prices have fallen significantly after a post-Katrina run-up. “As rebuilding efforts take hold and job growth gains momentum, consumers’ confidence should rebound and return to more positive levels by year-end or early 2006,” said Lynn Franco, director of the Conference Board’s Consumer Research Center.

You might also recall, however, that our latest business outlook survey — conducted before the onset of Hurricane Katrina — found that chief financial officers are more pessimistic than ever about the U.S. economy, pointing to the effects of a housing bubble that might burst, high fuel and health-care costs, increasing interest rates, and reduced pricing power.