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Consumers’ Outlook for U.S. Economy Plunges to Two-Year Low

Photographer: Scott Eells/Bloomberg

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Photographer: Scott Eells/Bloomberg

A shopper walks past a store window in New York.

Americans in October were the most pessimistic about the nation’s economic prospects in almost two years as concern mounted that continued political gridlock will hurt the expansion.

The monthly Bloomberg Consumer Comfort Index expectations gauge plunged to minus 31, the lowest level since November 2011, from minus 9 in September, a report showed today. The share of people projecting the economy will worsen jumped by the most since the collapse of Lehman Brothers Holdings Inc. five years ago. The weekly measure of current conditions fell to minus 34.1 in the period ended Oct. 13, the weakest since March.

The legislation passed by Congress last night to raise the debt ceiling and fund the government into 2014 may be setting the stage for another round of confrontations early next year. The fiscal impasse in Washington has spared few as today’s report showed consumers across almost all demographic groups grew increasingly distressed.

“The government shutdown has resulted in a startling decline in consumer sentiment and likely business sentiment that will result in a much slower pace of consumption and capital expenditures in the current quarter,” said Joseph Brusuelas, a senior economist for Bloomberg LP in New York. “Should lawmakers kick a decision into early 2014, it is likely that consumer sentiment will keep deteriorating.”

Claims Elevated

Other reports today showed more Americans than forecast filed applications for unemployment benefits last week, and factories in the Philadelphia region expanded more than projected in October.

Jobless claims decreased by 15,000 to 358,000 in the week ended Oct. 12 from a revised 373,000 in the prior period, according to Labor Department figures. California continued to work through a backlog, A Labor Department spokesman said, indicating it will take time to gauge the impact of the federal shutdown.

The Federal Reserve Bank of Philadelphia’s general economic index fell to 19.8 this month from a more than two-year high of 22.3 in September. Readings greater than zero signal growth in the area, which covers eastern Pennsylvania, southern New Jersey and Delaware.

Stocks fell, after the Standard & Poor’s 500 Index came within four points of a record, as investors assessed the effects of the budget standoff and International Business Machines Corp. and Goldman Sachs Group Inc. tumbled amid declining revenue. The S&P 500 declined 0.1 percent to 1,719.45 at 10:21 a.m. in New York.

Diminished Expectations

The monthly expectations gauge showed 47 percent of respondents said the economy was going to get worse, up 13 points from September. That was the biggest surge since October 2008, the month after Lehman Brothers was brought down by the financial meltdown as the housing bubble burst. Back then, the negative reading surged by 30 points to 82 percent.

The weekly Bloomberg comfort measure dropped 4.4 points from minus 29.7 the previous period, the biggest decline since April 2012. The measure reached an almost five-year high in early August.

Faith Williams, 72, a retired school librarian from Washington, said she’s thankful she has other sources of income to tide her over should social-security payments ever be delayed.

She said the shenanigans on Capitol Hill reminded her of her former wards. The gridlock “seems so childish,” Williams said. “I was a preschool librarian and we had ways of getting them to talk and behave.”

Broad Decline

All three components of Bloomberg’s weekly gauge dropped. The index tracking Americans’ views of their personal finances fell to minus 0.1, the first negative reading in five weeks, from 4.7. The buying-climate measure declined to minus 36.9 from minus 33.5 the week prior. A gauge of the current state of the economy decreased to minus 65.3, the worst in a year, from minus 60.2 the week before.

As Americans turned more downbeat about the economy and the state of their finances, retailers are bracing for a possible drag on holiday sales. Companies including Wal-Mart Stores Inc. (WMT), the world’s largest retailer, are watching to see how the fiscal uncertainty may affect consumer spending in the weeks ahead.

“As you would expect, we’re following this situation very closely,” Chief Executive Officer Mike Duke said on an Oct. 15 conference call. “It should come as no surprise that the government shutdown, it’s on the minds of our U.S. customers.”

No Damage

Companies such as Santa Clara, California-based Intel Corp. (INTC) say the government shutdown has not hurt their business so far. The world’s leading chipmaker reported third-quarter sales that exceeded estimates.

Regarding “the debt-ceiling debate, I’d say we have not seen any impact on our business,” Stacy Smith, Intel’s chief financial officer, said on an Oct. 15 earnings call. “I think generally the financial markets have been pretty tame in their reaction to this.”

Today’s confidence figures showed a decline among virtually every demographic group, including both sexes, all five age groups, blacks, whites and Hispanics, and all political leanings. The few exceptions included those with a household income between $25,000 and $39,999 and those living in the Northeast.

The comfort reading was positive only among the highest earners, with annual incomes greater than $100,000. For the broader category of those making at least $50,000 a year, confidence fell last week to the lowest level since March.

Renters Concerned

Sentiment among renters decreased to minus 49, the lowest in almost a year. Last week’s reading for blacks, minus 47, was the worst in more than a year.

The confidence gauge among political independents soured to minus 42.9 last week, weaker than either registered Republicans or Democrats, whose readings dropped to minus 25 and minus 26.6, respectively.

The worry for Abby Kral, 40, who lives in Washington and worked in the Senate until recently, is that a debt-ceiling compromise would be “only a short-term fix.”

“I feel like we always have a gun to our head, and we always figure it out,” Kral said. “But this time it feels a little different to me.”

To contact the reporter on this story: Ben Schenkel in Washington at bschenkel@bloomberg.net

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

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