Housing, lending problems smack confidence

Consumer confidence tumbled to the lowest level in a year in August as Americans' views of the job market deteriorated and turmoil on Wall Street and continued bad news from the housing front likely took a toll.

But it's unclear if the dimmer outlook is translating into fewer sales, and the drop came after the index hit multiyear highs in July. A separate report Tuesday showed healthy demand from consumers in the past week.

The consumer confidence index was a seasonally adjusted 105 in August, down 6.9 points from July and the lowest level since August 2006, the Conference Board said. The decline was the sharpest point drop since September 2005 following Hurricanes Katrina and Rita.

The confidence decline in part fueled selling on Wall Street.

Consumers' views of both the present and future deteriorated. The percentage of respondents who said jobs were "plentiful" fell to 27.5% this month from 30% in July and was the lowest since November.

"A softening in business conditions and labor market conditions has curbed consumers' confidence," says Lynn Franco, director of The Conference Board Consumer Research Center. "In addition, the volatility in financial markets and continued subprime housing woes may have played a role in dampening consumers' spirits."

But Franco and other economists say the data don't point to a meltdown in consumer spending, which accounts for more than two-thirds of all U.S. economic activity. The confidence index in July was the highest since August 2001, right before the terrorist attacks. So although confidence dropped this month, it was still fairly strong.

"The August confidence reading is only slightly below the 105.9 average in 2006, and is well above the 92 average of the prior three 'boom' years of this expansion," economists from Action Economics said in a note to clients.

Plus, what matters most for the economy is what consumers do, not what they say. With the unemployment rate at a low 4.6% in July, consumers will likely continue to spend at a healthy pace, says Richard Yamarone, director of economic research at Argus Research in New York.

"I can't imagine that they start pulling back on their spending reins now," he says.

Sales at retail chain stores rose 0.3% last week from the previous week, the International Council of Shopping Centers and UBS said Tuesday in their weekly report. That was the biggest gain in a month. Sales were up 2.5% from a year ago.

As the main driver of the U.S. economy, the Federal Reserve will likely be keeping a close eye on consumer spending as it ponders whether to cut interest rates in the wake of the tightening in credit markets and seesawing stock prices. Fed chairman Ben Bernanke and his colleagues next meet to discuss interest rates September 18, although the Fed does not have to wait until then to change policy.

In a survey of 37 economists conducted by USA TODAY last week, 21 said they expected the Fed to lower rates next month.

Joel Naroff, president of Naroff Economic Advisors in Holland, Pa., says if anything, the confidence report reduces the chances of a Fed cut.

"With the news concentrating on the subprime problems and the resulting impact on the equity markets, it is really a wonder that households didn't become totally depressed," he said in a note to clients. "That they didn't is good news. … We shouldn't expect any huge slowdown in spending in the near term. And that is how I suspect the Fed members will read this."