U.S. Consumer Confidence Drops to 2-Year Low

Consumer confidence in the U.S. unexpectedly sank and home prices stagnated, showing why the Obama administration and some Federal Reserve policy makers are pivoting to stem a housing slump that is threatening the economic recovery.

The New York-based Conference Board’s household sentiment index slumped to 39.8 in October, the lowest level since March 2009 and less than the most pessimistic forecast in a Bloomberg News survey, the group’s data showed today. Property values in 20 cities were little changed in August from the prior month and down 3.8 percent from 2010, according to S&P/Case-Shiller.

“The outlook continues to deteriorate,” said Yelena Shulyatyeva, a U.S. economist at BNP Paribas in New York. “It’s not good for confidence when people see their main asset, their homes, decline in value. Our best-case scenario is we’ll muddle through.”

Federal Reserve Bank of New York President William C. Dudley this week said breaking the ‘vicious cycle’ of declines in home prices and confidence should be a focus for the central bank as it tries to spur growth and bring down joblessness. The government yesterday announced a plan to help borrowers get lower-interest mortgages for their devalued houses as President Barack Obama acknowledged prior efforts hadn’t done enough.

The disappointing data and declining shares of United Parcel Service Inc. (UPS) and 3M Co. after the economic bellwethers reported results caused stocks to drop, halting a three-day rally. The Standard & Poor’s 500 Index fell 2 percent to 1,229.05 at the close in New York.

Survey Results

Estimates for the confidence index in a Bloomberg News survey of 76 economists ranged from 42.5 to 52. This month’s reading was even lower than the 53.7 average during the 18-month recession that ended in June 2009.

The report showed Americans’ outlooks for employment and incomes soured. The share of consumers who said jobs were plentiful dropped to the lowest level since December 2009, while the proportion expecting their incomes to rise over the next six months decreased to smallest in a year.

The report is in line with other surveys. The Bloomberg Consumer Comfort Index’s monthly expectations gauge dropped in October to the lowest level since February 2009. The Thomson Reuters/University of Michigan preliminary index of consumer expectations for six months from now dropped in October to the lowest since May 1980.

Sales Outlook

The drop in optimism helps explain why companies like Levi Strauss & Co. are concerned that spending will be restrained during the holiday shopping season. The San Francisco-based company is bracing for tepid sales after back-to-school shoppers balked at higher prices on its namesake jeans and Dockers pants.

“It is hard to imagine a very robust holiday season compared to last year,” Chief Financial Officer Blake Jorgensen said in a telephone interview Oct. 11. “We remain cautious around where the future is going over the next couple of quarters.”

UPS, the largest package-delivery company and a proxy for the economy, said today international shipping began to cool while U.S. expansion stagnated. 3M, the maker of products from LCD television parts to Scotch-Brite sponges, cut its 2011 profit forecast.

The drop in consumer confidence has yet to translate into a slump in household spending, which accounts for about 70 percent of the economy.

Pickup in Growth

A Commerce Department report in two days is projected to show the world’s largest economy grew at a 2.5 percent annual pace from July through September, almost double the prior quarter’s 1.3 percent gain, according to the median forecast of economists surveyed. Consumer spending is projected to have climbed at a 1.9 percent pace after increasing 0.7 percent in the previous three months.

Persistent joblessness remains a concern. Unemployment has held close to or above 9 percent for 30 months. Through September, the economy had recovered about 2.09 million of the 8.75 million jobs lost as a result of the 18-month recession that ended in June 2009.

The report from S&P/Case-Shiller showed home prices dropped in 18 of the 20 cities tracked in the year ended in August, led by an 8.5 percent decrease in Minneapolis. Home prices in Las Vegas made a new post-slump low. Detroit and Washington were the only areas showing year-over-year increases in property values.

Dudley yesterday said falling home values pose “a serious impediment to a stronger economic recovery” and predicted “continued modest growth” for the U.S.

‘Vicious Cycle’

“Continued house price declines could lead to even more defaults, foreclosures and distress sales, undermining wealth, confidence and spending,” Dudley said in the text of remarks given at Fordham University in the Bronx. “Breaking this vicious cycle is one of the most pressing issues facing policy makers.”

The Federal Housing Finance Agency yesterday said it would allow qualified homeowners to refinance no matter how much their homes have declined in value, expanding the terms of the 2009 Home Affordable Refinance Program. The agency said it would also eliminate some fees, reduce others and waive some risk for lenders.

The original HARP program had a goal of reaching 5 million borrowers. As of August, fewer than 895,000 loans had been refinanced.

To contact the reporters on this story: Bob Willis in Washington at bwillis@bloomberg.net; Shobhana Chandra in Washington at schandra1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz cwellisz@bloomberg.net

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