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Oct 25, 2013 9:18 PM by Alain Sherter - CBS MoneyWatch

Government shutdown slams consumer confidence

Consumers are increasingly fearful that conflict in Washington could damage the U.S. economy, with some forecasters warning that declining confidence could hurt spending during the key holiday shopping season.

Consumer sentiment has fallen to its lowest level since the fiscal cliff crisis in late 2012, according to the Thomson Reuters/University of Michigan index, with respondents to the survey citing their concerns that this month's government budget shutdown could slow economic growth. The sentiment index fell to 73.2 in October, down from 77.5 the previous month and from 82.6 in the year-ago period.

"This is a bad report," said Chris Christopher, Jr., director of consumer economics, IHS Global Insight, in a research note. "As the holiday shopping season is right around the corner, consumers are feeling sour. And that is bad news for retailers since a more confident consumer is more likely to open their wallet for discretionary items in November and December. The holiday retail sales season does not look very bright."

Richard Curtin, chief economist for the monthly survey, said in a statement that concerns about the job market are increasing. Following the 16-day government shutdown, 61 percent of those polled expect economic conditions to worsen, up from 50 percent in September. Only a quarter of households surveyed think their finances will improve next year, while half expect no income increase.

Optimism about the labor market peaked a year ago, according to the index, which in the latest survey found that "consumers expected the national unemployment rate to edge upward during the year ahead."

Weak payroll growth is also weighing on consumer sentiment. Employers added only 148,000 jobs in September, short of analyst forecasts. With the labor market remaining shaky and ongoing uncertainty over fiscal policy in Congress, some companies are girding for weaker holiday sales.

eBay (EBAY) CFO Robert Swan warned last week that holiday sales could be soft, citing a recent sharp decline in e-commerce growth. In an Oct. 16 conference call to discuss eBay's third-quarter results, he said that "all the anxiety we see when we pick up the newspaper everyday makes us fairly cautious about how we look at the holiday season and its impact on our outlook for the fourth quarter."

Measures of consumer confidence survey are often volatile, making them less reliable than other metrics in forecasting the economy. Despite the rising anxiety of families polled by the U. of Michigan/Thomson Reuters, respondents also reported gains in household wealth, including the rising values of stocks and their homes.

As a result, some experts remain optimistic that consumer spending will hold up. Stuart Hoffman, chief economist with PNC Financial Services Group, expects the strong stock market and ongoing housing rebound, along with falling gasoline prices, to boost holiday spending. The banking firm estimates that holiday sales this year will rise upwards of 3.5 percent over the comparable period in 2012.

The National Retail Federal predicts a 3.9 percent increase in retail sales in November and December compared with the year-ago period.

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