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US consumer confidence slips in June

Consumer confidence in June posted its largest one-month drop since just after Sept. 11 as a weak jobs market, plunging stocks and corporate accounting scandals took a toll on Americans, a report showed on Tuesday.

But surveys and actual consumer behavior often differ. Other reports on Tuesday showed hearty spending on big-ticket items like homes and at retail stores.

The data suggested consumers still are buttressing the economy's recovery. But with the pace sluggish and the outlook murky, most analysts expect the Federal Reserve to hold interest rates steady when it finishes its two-day meeting on Wednesday.

The Conference Board, a private research group, said its closely watched index of consumer confidence fell to 106.4 in June from an upwardly revised 110.3 in May, roughly in line with analysts' expectations.

Despite the June dip, the index remains well above the 7-1/2 year low of 84.9 hit last November and at higher levels than seen in the early stages of recovery after the 1990-91 recession.

To analysts, that indicates consumer spending should stay solid, a crucial factor given consumption accounts for two-thirds of US economic activity.

"The latest readings point to continued consumer spending and moderate economic growth," said Lynn Franco, director of the Conference Board's Consumer Research Center.

Stock prices initially rose on the confidence data, drawing money out of safe-haven Treasuries. But a late-day tumble on profit worries sent the Dow Jones industrial average down 1.6 per cent. The benchmark 10-year Treasury note finished little changed to yield 4.82 per cent.

While consumers might say they were not feeling so chipper, that had not stopped them buying new homes. Indeed, disillusion with stock prices was making housing seem an ever more attractive investment option.

Thus existing homes sales recorded their fourth fastest pace on record, even though the headline number dipped slightly by 0.3 per cent to a seasonally adjusted annual rate of 5.75 million units in May from 5.77 million in April.

"People wouldn't be buying so many homes if they were fearful of their financial future," pointed out Sal Guatieri, senior economist at Bank of Montreal/Harris Bank in Toronto.

"When we see the economy recover more fully in the second half of the year and generation of more jobs, confidence will come back," he added.

Equities aren't everything

James O'Sullivan, an economist with UBS Warburg in Stamford, Connecticut, noted the dire performance of stocks was what weighed on consumer sentiment in the first place.

Major indexes have declined in each of the past five weeks, with the broad Standard & Poor's 500 index losing roughly 10 per cent during that period.

But it seemed consumers as a whole were not as vulnerable to declining stock prices as Wall Street liked to think.

"While the stock market is retesting the lows of last fall the confidence index is much higher," said O'Sullivan.

"The broader point is that the economic numbers are looking more upbeat than the stock market -- the market is suggesting a double dip in the economy, the data is not," he said.

Safe as houses

One reason for optimism was that the vast majority of consumers had far more of their wealth tied up in the family home than in equities, and the housing market is booming.

Existing home sales have now set records in four of the five months to May and the median sale price has risen to an all-time high of $154,600.

"As long as mortgage rates remain low and home prices do not crater, home sales should continue to be very strong, which will support the entire consumer sector," said Stephen Stanley, senior financial economist at Greenwich Capital Markets.

The data comes just as the Federal Reserve is widely expected to leave interest rates steady at four-decade lows of 1.75 per cent at the end of its meeting on Wednesday.

Few analysts expect the Fed to begin raising rates before the employment picture improves, and the outlook for jobs was perhaps the one really weak spot in Tuesday's confidence report.

Americans said they have had the hardest time finding new jobs in six years, with the number of people saying jobs were "hard to get" rising to 23.1 per cent from 21.8 per cent in May.

Analysts said the rise pointed to little improvement in the jobless rate, currently at 5.8 per cent.

The Conference Board, a New York-based research group sponsored by major US companies, surveys 5,000 households to compile its monthly report.

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