Consumers are jittery about war with Iraq

Though Americans are less confident, sales of new homes climb again.

©Associated Press
January 29, 2003

NEW YORK -- The threat of war with Iraq is eroding consumer confidence, economists said Tuesday, but it doesn't yet seem enough to jeopardize the upward trend in new home sales.

"There's no doubt the uncertainties about geopolitical events weigh on people's minds," said Josh Feinman, chief economist with Deutsche Asset Management in New York. "Is there going to be a war? Certainly, that's contributing to people's anxiety."

The Consumer Confidence Index slipped to 79 in January from a revised 80.7 in December, but was above the 78.5 that analysts were anticipating. The index is based on a survey of 5,000 U.S. households and compares to its base of 100 in 1985.

"Overall readings continue to reflect the country's lackluster economic activity," said Lynn Franco, director of the Conference Board's Consumer Research Center. "Now, with the threat of war looming, consumers have grown increasingly cautious about the short-term outlook."

Florida's consumer confidence fell sharply in January amid growing concern over a possible war with Iraq and wariness about business investment, according to a University of Florida report Tuesday. The state consumer confidence index dropped from 86 to 82, the second 4-point drop in two months.

UF said Floridians' perceptions of economic conditions expected over the next year fell 9 points to 66, the lowest level since October 2001, while perceptions of business conditions over the next five years fell 5 points to 73, its lowest level since August 1996.

"These numbers do not bode well for the economic turnaround," said Chris McCarty, director of the UF Survey Research Center, which compiled the report.

The Conference Board report showed consumers were also concerned about the job outlook and their incomes in the next six months. The index has fallen since May, when it stood at 110.3, ticking upward just once in November.

"The decline came entirely from the expectations component, again reflecting fear of what comes next," said Oscar Gonzalez, senior economist at John Hancock Financial Services in Boston. "The next few weeks are so uncertain that, in this instance, the numbers probably reflect the American mood, rather than a rational assessment of the economic environment."

Separately, the Commerce Department reported Tuesday that sales of new single-family homes rose in December to their highest level since the government began tracking results in 1963.

New home sales reached a seasonally adjusted annual level of 1.08-million in December, achieving both a monthly and a yearly record. Consumer spending accounts for two-thirds of economic activity, and new home sales have helped buttress an otherwise lackluster economy.

"In times of uncertainty, people still want a home, and the home front is helping keep the economy moving forward," Gonzalez said.

For the year, new home sales ballooned nearly 8 percent over 2001 results.

Meanwhile, the latest durable goods report showed only a marginal increase, suggesting the battered manufacturing sector is still far from being able to contribute to an economy recovery.

New orders to U.S. factories for big-ticket goods -- also known as durable goods -- rose by 0.2 percent in December, the Commerce Department said Tuesday. Though economists were expecting a much bigger increase of 1 percent, the report did improve from November, when new orders of durable goods fell by a sharp 1.3 percent.

Economists say businesses must start investing in costly capital goods for the economy to achieve a sustained comeback.

"The manufacturing sector is deep in the dumps, and this report gives little hope of improvement," Gonzalez said. "The only good news is that the results round out a flat year." For all of 2002, new orders to factories for costly manufactured goods fell 0.2 percent, compared with an 11.6 percent plunge suffered in 2001.

Federal Reserve Chairman Alan Greenspan and his Federal Open Market Committee are meeting in Washington to decide whether to change the short-term interest rate, currently at a 41-year low of 1.25 percent. Many economists believe they'll maintain the status quo, hoping to reinvigorate business spending and sustain consumer participation in the modest recovery.

Low interest rates spurred a mortgage refinancing boom and have given people extra cash to spend, helping the economy.

In the consumer confidence survey, the percentage of people who said they planned to buy a home in the coming months increased slightly to 3.4 percent from 3.2 percent. However, fewer people plan to purchase a car or major appliance, the Conference Board found.

"Whether a drop in confidence will lead to a decline in spending is always a wild card, probably even more so right now" because of the threat of war, Gonzalez said.

Those surveyed also expressed more worries about the job front in the next six months, reflecting consumers' conflicting sentiments about the economy. They are enticed by low-interest rates and plan to purchase new homes, despite an unstable job market.

Consumers expecting fewer jobs in the first half of the year edged up to 20.9 percent in December from 20.2 percent. Those who thought their incomes would increase fell to 18.4 percent from 19.6 percent in December. Overall, consumers are less optimistic about the next six months than they were a month ago.

"The only way to get sustained improvement in consumers' outlook is that geopolitical issue has to be resolved," Feinman said. "As long as it's continuing to loom, I think people are going to stay in a funk."

-- Times staff writer Jeff Harrington contributed to this report.

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