Consumer Confidence Shows Surprise Drop

Consumer confidence unexpectedly dipped this month to its lowest level since April, raising concern that a key engine keeping the economy out of recession may be slowing.

The Conference Board, a New York-based business research group, said its monthly measure of consumer sentiment dipped to 114.3 in August, from a downwardly revised 116.3 last month. Though the gauge remained above its low of 109.2 in February, the drop surprised analysts who had expected a slight rise to 117.5.

However, the drop was due entirely to declining perceptions of the present-day economy. Expectations of future economic conditions, which are considered by some to be a more important indicator, rose modestly.

Consumer confidence in the Pacific region, which includes California, increased slightly in August, with the overall number rising to 110.9 from 110.1. The present-day measure slid to 143.2 from 144.6. But the expectation index climbed to 89.3 from 87.1.

Consumer sentiment is watched closely because of the critical role consumer spending is playing in keeping the economy out of recession. Though the growth in spending has fallen from last year’s levels, it has combined with a vibrant housing market to partially offset the severe drop in spending by U.S. businesses.

“Would you panic at these numbers? No. Would they give you a little cause for concern? Yes,” said Jason Bram, an economist at the Federal Reserve Bank of New York.

The sag in U.S. consumer confidence came amid a spate of layoff announcements this month that chipped away at consumer psyches, experts said. On Tuesday, for example, computer maker Gateway Inc. said it would lop off 25% of its global work force.

The news sparked a sell-off in the stock market with the Dow Jones industrial average falling 160 points to 10,222.03. However, trading was light in advance of the Labor Day weekend.

The report consists of two components, one that measures how consumers feel about their current-day situation and another that gauges their expectations about the future.

The index of current conditions slipped to 145.8 from 151.3. But the measure of what people expect six months from now rose modestly to 93.3 from 92.9.

“Confidence is still within the range that we’ve seen most of this year,” said Gary Thayer, chief economist at brokerage A.G. Edwards & Co. in St. Louis. “It would be more of a concern if we saw a drop to new lows.”

Also, consumer confidence remains far more robust today than during recessions of the last two decades, according to Moody’s Investors Service.

August’s 114.3 reading is far above the 72.6 average during the 1990-91 recession and 65 average in 1981-82, according to Moody’s.

As long as the confidence index remains above 80, the economy is unlikely to fall into recession, said Lynn Franco, Conference Board director of consumer research.

Some forecasters believe the economy is in the process of hitting bottom and will begin a slow recovery sometime this year.

However, the biggest threat to a rebound is the pace of layoffs, many experts agree. If consumers were to significantly rein in their spending, the economy almost certainly would give way to a recession.

“Everybody knows that if the consumer gives up you’re talking about a really ugly situation,” said Robert J. Barbera, chief economist at Hoenig & Co.

More disappointing news may come today. The Commerce Department is scheduled to release revised numbers for second-quarter gross domestic product, or the total of all goods and services produced in the U.S.

The consensus on Wall Street is that GDP will be revised from 0.7%--already the slowest pace in eight years--to show there was no growth at all.

Some expect the new estimate to be a negative number. That would mean the economy is contracting--as opposed to simply growing at a slower pace--and could be the first step toward an official recession. Recessions normally are defined as two straight quarters of declining GDP.

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