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Katrina deals blow to consumer sentiment

Posted on: Friday, 16 September 2005, 09:48 CDT

By Pedro Nicolaci da Costa

NEW YORK (Reuters) - U.S. consumer sentiment this month plunged to its lowest in over a decade as the fallout from Hurricane Katrina made Americans nervous that the economy may slow down, a report said on Friday.

The University of Michigan said its reading on confidence dropped sharply to 76.9 so far this month from 89.1 in August, according to sources who saw the subscription-only report.

That was lower than the reading after the September 11, 2001, attacks on U.S. cities, but comparable to that seen following Hurricane Andrew in 1992.

Expectations about the future, as measured by the survey, also took a serious hit, swooning to a 13-year low.

"These are abysmal numbers, suggesting a deeply pessimistic consumer in the first half of September," said Christopher Low, chief economist at FTN Financial.

The expectations component retreated to 63.6 from 76.9, while the one for current conditions dived to 97.7 from 108.2.

Consumer spending accounts for some two-thirds of U.S. economic activity, so changes in sentiment are monitored for signs of future retail trends.

However, the correlation between confidence and sales has weakened in recent years, with consumers telling surveys things are getting worse while they continue to buy cars and homes.

That might explain why financial markets had a seemingly counterintuitive reaction to the numbers. Stocks rose about a half percentage point on brokerage upgrades of Exxon Mobil Corp. and Intel Corp..

Nonetheless, the report did stoke worries that the U.S. economy might be on the verge of tougher times.

Even before Katrina's devastation, economists feared that the economy might not be able to withstand headwinds from high energy prices and a potentially overvalued housing market.

The storm prompted many forecasters to downgrade growth predictions for the second half of the year.

Many on Wall Street see Katrina delivering a sharp blow to the economy but believe substantial government spending and reconstruction efforts should boost growth in 2006.

A Reuters survey of 23 economists this week found estimates of gross domestic product growth in the third and fourth quarter have been cut to 3.6 percent and 3.1 percent respectively from 4.3 percent and 3.4 percent before Katrina hit the U.S. Gulf Coast at the end of August.

Source: REUTERS

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