Confidence Plunge Could Mean Rough Sledding for Santa

The unexpected tumble is badly timed, economists say.
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Consumer confidence fell for a fifth-straight month in November, confounding economists' expectations for a rise and quashing any remaining hopes for a meaningful recovery in retail sales this Christmas.

Still, things aren't as bad as they seem. Consumers are more hopeful, and economists say price discounts and promotions should offer some support to retailers over the holiday period.

Confidence fell to a 7 1/2-year low of 82.2 in November, down from 85.3 in October and below estimates for a reading of 86.1. Meanwhile, the present situation index plunged to 93.5 from 107.2 last month amid rising unemployment and layoffs. While jobless claims had been declining recently, the unemployment rate jumped sharply in October to 5.4%.

"The 93.5 number is still too high," said Delos Smith, senior economist at the Conference Board. "We don't have an economy that reflects that number, and I expect it to go down into the 80s. Where it stops depends on the employment situation."

Struggle Aplenty

The percentage of consumers who think jobs are plentiful fell to 17% from 20.9% in November, while the percentage who think jobs are hard to get rose to 23% from 20.6%.

Concerns about the labor market have outweighed some more positive developments recently, including a decline in oil prices, lower mortgage rates and rising stock prices.

"The stock market has been doing well, but from

consumers' point of view it's still low," Smith said. The

S&P 500

is up 21% from its low on Sept. 21 while the

Nasdaq

is up 37%. But for the year, the S&P is still down 13% while the Nasdaq is down 22%.

Unlike the University of Michigan survey, the Conference Board survey heavily weights questions about the labor market. In fact, according to Brian Jones, economist at Salomon Smith Barney, half of the questions on the current conditions index and a third of the questions on the expectations index are related to employment issues. The Michigan survey had edged higher over the past two months, but mainly because of the lowest consumer inflation expectations since the 1950s.

While the confidence data for November look soft, some economists said it's not as bad as the market's initial reaction might suggest. The

Dow Jones Industrial Average

posted a triple-digit loss in the wake of the report. Still, the expectations index actually rose to 74.6 in November from 70.7 in the prior month. Smith expects this indicator to continue its ascent, possibly moving into the low 80s.

"The drop in the headline reflects a huge 13.7-point decline in the present situation index, which more than offset a 3.9-point rise in the expectations index," said Ian Shepherdson, chief economist at High Frequency Economics. "But the present situation index is nothing more than a reflection of the unemployment rate, which lags economic growth."

In 1991, the present situation index did not hit bottom until December, when it slumped to 22.5. But the economy had started to recover the previous April. By contrast, expectations are a leading indicator and are consistent with modest spending gains, he said.

The National Retail Federation expects holiday retail sales, excluding restaurant and auto sales, will be 2.5% to 3% higher than the $201 billion registered last year. That would be the worst growth in revenue since 1990, when sales were virtually unchanged.

Home, Car, Appliance

Buying plans were mixed in the latest confidence report. Those who expect to buy a home over the next six months fell to 3% from 3.5%, while plans to buy a car fell to 6.5% from 8.8%. But the percentage of those planning to buy major appliances rose to 29.4% from 26.8%.

"These levels are consistent with weak spending, but not outright declines," noted Mike Cloherty, an economist at Credit Suisse First Boston. "At a time like this there are a lot of discounts, so the confidence report isn't necessarily a good indicator."

David Orr, chief capital markets economist at First Union, agrees that the holiday season will not be disastrous because of promotional activity and because some people may throw caution to the wind after such a depressing few months.

Still, he believes the present situation index better correlates with actual consumer behavior over a two- or three-month time frame. While retail sales may hold up over Christmas, he said, the consumer could become more skittish in the first quarter, especially if unemployment hits 6% and incentives and discounts begin to wane.

Separately, the

Federal Reserve

downwardly revised data for U.S. industrial output and capacity utilization in October. U.S. industrial output slid 1.2%, versus the 1.1% originally reported. That's the biggest one-month decline since November 1990, when the U.S. was last in recession. Capacity utilization fell to a revised 74.6% in October, vs. the 74.8% originally reported.