U.S. Economy: Confidence Unexpectedly Rose This Month

By Shobhana Chandra

Sept. 30 (Bloomberg) -- Consumer confidence unexpectedly rose in September in a survey taken before the recent worsening of the credit crisis and plunge in stocks.

The Conference Board's confidence index increased to 59.8, a third consecutive gain, from 58.5 the prior month, the New York- based group said today. Other reports showed home prices fell in July at the fastest pace on record and business activity slowed less than forecast this month.

Since the confidence survey's Sept. 23 cutoff, the odds have risen that consumers will retrench in the wake of failing banks, evaporating wealth and paychecks that aren't keeping up with inflation. Stocks tumbled yesterday after the government failed to approve a financial-rescue plan.

``The environment has become pretty negative,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut, who had forecast confidence would rise. ``The momentum has certainly turned down. If the turmoil continues, the risk of a severe recession goes up.''

Americans are likely to lose confidence heading into the presidential election on Nov. 4. Today's report is the next-to- last Conference Board sentiment reading before the vote.

The National Association of Purchasing Management-Chicago's business activity index fell to 56.7 in September from 57.9 the prior month. Fifty is the dividing line between growth and contraction.

Stocks Up

Stocks extended earlier gains following the reports and Treasury securities fell. The Standard & Poor's 500 index rose 5.3 percent to close at 1,164.74. The yield on the benchmark 10- year note rose to 3.83 percent at 4:30 p.m. in New York from 3.58 percent late yesterday.

Equities rallied on expectations lawmakers would salvage the bank rescue package. The House of Representatives yesterday voted down a $700 billion plan intended to restore confidence in U.S. banks, sending the S&P 500 Index tumbling almost 9 percent.

The confidence gauge was forecast to drop to 55 from an originally reported 56.9 in August, according to the median forecast in a Bloomberg News survey of 62 economists. Projections ranged from 48 to 66. The index reached a 16-year low of 51 in June and averaged 103.4 last year.

Since the cutoff date, Washington Mutual Inc. joined Lehman Brothers Holdings Inc. in bankruptcy, Citigroup Inc. acquired Wachovia Corp. to prevent the collapse of the sixth-biggest U.S. bank by assets, and stocks suffered their biggest drop since 1987.

Home Values Drop

Earlier today, the S&P/Case-Shiller home-price index of 20 U.S. metropolitan areas dropped 16.3 percent in July from a year earlier, more than forecast, after a 15.9 percent decline in June. The gauge has fallen every month since January 2007, and year-over-year records began in 2001.

``The fact that house prices quickened their slide before the worst point in credit markets hit this month does not bode well,'' said Derek Holt, an economist at Scotia Capital Inc. in Toronto.

The Conference Board's measure of present conditions dropped to 58.8, the lowest since 1993, from 65 the prior month. The gauge of expectations for the next six months increased to 60.5 from 54.1.

``These results did not capture all of the tumultuous events in the financial sector this month,'' Lynn Franco, director of the Conference Board's confidence survey, said in a statement. ``Until the dust settles a bit more, we will not know the full impact.''

Jobs Outlook

Temporary shocks usually have a detrimental effect on confidence for two to four months unless they are accompanied by job losses, she said.

The share of consumers who said jobs are plentiful dropped to 12.2 percent, the fewest in five years, from 13.5 percent last month, today's report showed. The proportion of people who said jobs are hard to get increased to 32.8 percent from 31.7 percent.

Compared with other sentiment measures, the Conference Board's index tends to be more influenced by consumer attitudes about the labor market, economists said. So far this month, 466,000 Americans a week on average filed first-time claims for unemployment benefits, up from 443,000 in August and 363,000 in the first six months of the year.

A report last week showed the Reuters/University of Michigan final sentiment reading for this month declined from a preliminary figure issued in early September as the credit crisis deepened. The reading was still up from August, reflecting the decline in gasoline prices, economists said.

Payroll Forecast

The economy probably lost another 105,000 jobs in September, the ninth consecutive monthly decline, according to the median estimate in a Bloomberg survey ahead of a Labor Department report due Oct. 3. Payrolls dropped by 605,000 workers in the first eight months of the year.

Job cuts may swell as the effects of the financial meltdown ripple through other industries. Fewer jobs and less-available credit indicate consumer spending, which accounts for more than two-thirds of the economy, will weaken further.

Fewer Americans were able to obtain an auto loan this month, according to CNW Marketing Research in Bandon, Oregon, which analyzes auto-industry data.

``Given the relatively weak state of the economy, that's obviously impacting the consumer's ability or willingness to come out and buy a new car,'' General Motors Corp. Chief Executive Officer Rick Wagoner said in a Bloomberg Radio interview on Sept. 25 from Flint, Michigan.

Consumer spending this quarter will be unchanged, the weakest performance since 1991, according to the median estimate in a Bloomberg survey earlier this month.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net