- The Washington Times - Wednesday, September 28, 2005

Consumer confidence this month plummeted by the most since the 1990 oil price spike and recession, triggered by the big jump in gasoline prices and rise in unemployment after Hurricane Katrina.

Rising interest rates also weighed on consumers and the housing market even before the storm, causing contracts on new homes to plunge in August by 9.9 percent, the Commerce Department said yesterday in another report. The combination of events left consumers feeling their most glum since 2003.

Federal Reserve Chairman Alan Greenspan yesterday made it clear that the central bank is more intent than ever on forcing up the rates on mortgages and other loans to quell what it sees as an inflation problem inspired by high energy prices and a potential bubble in the housing and bond markets.

Shrugging off the big drop in confidence this month, he told the National Association for Business Economics that the economy has demonstrated the resilience it needs to absorb and recover from shocks like gas price spikes and disasters.

Alluding to the swings in consumer mood, he noted the economy has remained stable, despite “alternating and infectious bouts of human euphoria and distress.”

“The flexibility of our market-driven economy has allowed us, thus far, to weather reasonably well the steep rise” in energy prices in the past two years, he said.

However, some economists are more worried than Mr. Greenspan about the blow to consumers and the economy from recent events.

“A drop of this magnitude is concerning,” said Keith Hembre, chief economist at U.S. Bancorp Asset Management. Consumers drive about 70 percent of economic activity in the United States.

“If the consumer gets weighed down by the combination of higher energy prices, the bursting of a housing bubble, and higher interest rates, you can forget about optimistic forecasts” for the economy next year, said Morgan Stanley Chief Economist Stephen Roach.

While gas prices receded after initially spiking to more than $3 a gallon after the destruction of oil facilities by Katrina, they are starting to rise again in the aftermath of Hurricane Rita, which damaged fewer facilities but added to Katrina’s losses, Morgan Stanley noted.

If pump prices stay near $3 a gallon, that will drain $90 billion a year from consumer spending money. Sharply higher winter heating bills caused by even bigger jumps in the cost of heating oil and natural gas will drain another $50 billion, the investment bank estimates.

Combined, the steep rise in energy costs will cut consumers’ disposable incomes by about 1.5 percent in the next year and prompt people to curb their urges to drive, shop and vacation, it estimates.

But Morgan Stanley’s Richard Berner notes that help is on the way, with political leaders promising to spend from $100 billion to $200 billion to recover and rebuild after Katrina.

“I have no doubt that Congress and the administration are prepared to authorize whatever it takes to repair damage from the storms, mitigate the hit to income from surging energy quotes, and stanch the slide in voter approval,” Mr. Berner said.

The result may be a strong rebound in the economy next year as rebuilding gets under way in earnest, he said.

Lynn Franco, consumer research director at the Conference Board, the private research group that published yesterday’s confidence figures, said consumer spending will be hurt in the short run, but confidence should eventually bounce back. The index plunged to 86.6 this month from 105.5 in August.

“Historically, shocks have had a short-term impact on consumer confidence,” she said. “Fuel prices remain high, though they have retreated in recent days, and when combined with a weaker job market outlook, will likely curb both confidence and spending for the short run.”

But “as rebuilding efforts take hold and job growth gains momentum, consumers’ confidence should rebound and return to more positive levels by year-end or early 2006,” she said.

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