US Consumers Find Little Cheer as Holiday Season Nears

29 November 2007

NEW YORK: Gloom and doom surround US consumers as each day they are confronted by falling house prices, rising fuel costs and the unpredictable vagaries of the stock market.

Optimism about economy is being eroded, according to the Conference Board, which reports a November fall in its consumer confidence index to 87.3 from 95.2 in October. Worse yet, consumers' expectations about the economy fell to 68.7 from 80.

Warns the research group's director Lynn Franco : "It remains to be seen in the next month or two as to whether these declines are more of a shock or if they're a recession signal."

The omens, however, are not propitious. Apart from oil-price shocks at the start of the Iraq war in 2003 and Hurricane Katrina in 2005, consumer expectations readings have not been as low since the 1990-91 recession.

The survey found that consumers are retreating from plans to buy homes and cars, although they still expect to spend more on gifts this holiday season.

The University of Michigan's index of consumer sentiment also fell to a two-year low this month as gasoline prices soared.

While Standard & Poor's Case-Shiller index reveals that house prices posted their biggest decline on record during the third quarter - down 1.7% from the second quarter and 4.5% year-on-year.

The Federal Housing Finance Board says the average purchase price was $295,573 (€200.5k; £143k), a 3.5% drop from a year earlier and the steepest annual drop recorded since it began publishing the data thirteen years ago.

Economists at Goldman Sachs say the subprime fiasco has increased the chance of recession next year from around 30% to between 40%-45%.

The haruspices expect the Federal Reserve to cut its interest-rate target to 3% by mid-2008 from the current 4.5%: "We believe such aggressive action is necessary to counteract the effects of the housing downturn and the associated credit crunch."

Data sourced from Wall Street Journal Online; additional content by WARC staff