Consumer Confidence Drops in October

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NEW YORK (Reuters) — U.S. consumer confidence unexpectedly dropped in October to its lowest level in two-and-a-half years, while housing prices were unchanged at anemic levels in August, data showed Tuesday.

Brighter-than-expected manufacturing and jobs data in recent weeks had tempered fears the economy could lapse back into recession, with most expecting a slow pace of growth that should avoid contraction, but the surprising drop in consumer confidence suggests the improvement in third quarter economic growth may not be sustained.

The S&P/Case Shiller composite index of house prices in 20 metropolitan areas was flat compared with the month before on a seasonally adjusted basis, frustrating expectations for a gain of 0.1 percent.

Separately, the Conference Board said its index of consumer attitudes fell to its lowest level since March 2009 as consumers fretted about job and income prospects.

Analysts said the weaker-than-expected home price data was disappointing but not altogether shocking as the market struggles to get out from under a glut of unsold homes and ongoing foreclosures that are holding prices down.

[See a collection of political cartoons on the economy.]

While prices are expected to remain depressed for some time, any further declines are expected to be modest.

"We were looking at sort of a stabilizing picture at these low levels, and we still see that, but we are still at very stressed levels," said Sean Incremona, economist at 4Cast Ltd in New York.

On a seasonally adjusted basis, prices fell in 14 of 20 cities, with Atlanta and Las Vegas among the biggest losers, according to the S&P/Case-Shiller data.

The annual rate of decline slowed, however, with prices in the 20 cities down 3.8 percent compared with a year-over-year decline of 4.1 percent the month before. That still was a bigger drop than the expected 3.5 percent decline in August.

"The good news is continued improvement in the annual rates of change in home prices," David Blitzer, chairman of the index committee at Standard & Poor's, said in a statement.

"In spring and summer's seasonally strong period for housing demand, we cautioned that monthly increases in prices had to be paired with improvement in annual rates before anyone could declare that the market might be stabilizing."

The struggling housing market continues to be one of the biggest hurdles for the economic recovery as attempts to bolster the sector have had limited success.

[See a slide show of 6 ways to fix the housing market.]

In the latest efforts, the Obama administration said Monday it would expand a mortgage refinancing program in a step that could help up to 1 million borrowers.

A separate home price index from the Federal Housing Finance Agency showed prices declined 0.1 percent in August from July.

The index is calculated using purchase prices of houses financed with mortgages that have been sold to or guaranteed by Fannie Mae or Freddie Mac .

CONSUMERS ON THE ROPES

In financial markets, the day's data was eclipsed by the cancellation of a meeting of euro zone finance ministers that added to doubts about the region's efforts to tackle its debt crisis.

Analysts are hoping to get confirmation of a growing but sluggish U.S. economy from U.S. gross domestic product data for the third quarter later in the week. The advance reading is expected to show the economy grew at an annual rate of 2.5 percent after a weak first half of the year, according to a Reuters poll of economists.

October's drop in consumer confidence, however, suggested any improvement in third-quarter economic growth may not be sustained.

The Conference Board's index of consumer attitudes fell to 39.8 from a upwardly revised 46.4 the month before. Analysts had expected a reading of 46.0.

The expectations gauge was also at its lowest level since March 2009, just before the economy officially crawled out of recession.

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Consumer Confidence Drop Could Spell Trouble for Incumbents

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The recession is over, jobs are slowly coming back, and third-quarter GDP is expected to climb. Yet one indicator suggests that consumer confidence still sank sharply and unexpectedly this month. While the impetus is unclear, the result could be not only more economic pain, but political troubles for incumbents in Washington.

According to the Conference Board, a nonprofit business membership and research association, consumer confidence tumbled 6.6 points from September to October, to 39.8 (on a 100-point scale, with 100 equaling 1985). This reading defied expectations; economists had predicted the October index would remain flat. However, the dip in consumer confidence is particularly troubling because it is at its lowest point since March 2009, when the economy was still in recession. For President Obama, and perhaps any incumbent, this latest figure should be particularly distressing. It shows that, even with an economy showing signs of renewed vigor, the American public is growing pessimistic, which can easily translate into anti-incumbent fervor come Election Day.

[See how the Obama administration is trying to help homeowners.]

The Conference Board's consumer confidence figure is now slightly lower than it was in August, when lawmakers wrangled over raising the debt ceiling, resulting in ratings agency Standard & Poor's downgrading the U.S. credit rating. That month, the index dropped from 59.2 to 44.5. This month, however, no event appears to have precipitated worsening sentiments. Rather, consumers appear to have lost their optimism; while the measure of future expectations rose by 1.6 points in September, it fell by 6.4 points this month.

At the core, the apparent decrease in consumer confidence shows that sustained high unemployment may have finally caused Americans to lose hope, says Ken Goldstein, economist at the Conference Board. "It's not as if job growth [and] wage growth have dropped significantly. The change is really about consumers...giving up some hope that things are going to get better," he says.

Contributing to that malaise is a pervasive sense that government is unwilling or unable to provide any assistance. "The sideshow in July and August about getting the debt ceiling down shook people's confidence that people in Washington even know what they're doing," says John Cannally, economic strategist at LPL Financial, a Boston-based financial services firm. The president's big push for his American Jobs Act, and its subsequent drawn-out failure, as Congress appears ready to reject it piece by piece, could easily worsen this sentiment.

That spells trouble for incumbents, particularly the president. Some studies have shown a positive correlation between consumer confidence and presidential approval ratings, as well as with other measures of political sentiment, like whether the country is moving in the right direction. Discontent with Washington and the economy drove the 2008 and 2010 "wave" elections and could easily do so again.

The president's latest executive actions to boost the economy—revamping HARP, a refinancing program for troubled homeowners, and a push for helping student loan borrowers to be announced tomorrow—appear to be as much about proving that the White House cares about the economy as boosting growth itself. Reinstating hope in the future, particularly as the election gets closer, could go a long way toward boosting consumer confidence and thus, perhaps, confidence in the president himself.

[See how the recession is affecting young adults in the U.S.]

Consumer confidence is, by nature, a complicated indicator—an attempt to objectively measure a subjective condition. In fact, there is a fundamental disconnect between objective measures of the economy and public perception, says Canally. "All of [the leading consumer confidence indicators]—Rasmussen, [University of] Michigan, Conference Board—are all at 30-year lows," despite an economy that is showing a few signs of strength again, he says, and according to his analysis, "The gap between what consumers are feeling, seeing, and hearing has never been wider."

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