Q3 Ends with Moderating Consumer Sentiment, but Confidence Hit by October Plunge

Though the majority of the news as of late has focused on big names within the financial market, it has been a challenging economy for both large institutions and consumers alike. I believe the consensus is finally out that we are indeed in recession as a number of macroeconomic factors continue to negatively affect U.S. consumer confidence.

In August and September, the unemployment rate stood at 6.1 percent, having increased from the 4.7 percent reported in August and September of 2007. In the week ending October 18, the 4-week moving average for insured unemployment increased by 44,250 from the preceding week’s average, increasing from 3,635,750 to 3,680,000.

The financial market turmoil, along side a visibly weak job market, has had an obvious negative impact on the perceptions of Americans. As of September, the Consumer Confidence Index – a monthly survey of 5,000 U.S. households issued by the Conference Board – stood at 61.4, down nearly 40 percent from its reading in September of 2007.

Showing a similar downward trend, the Discover Spending Monitor – a monthly survey that measures the spending intentions and economic confidence of 15,000 consumers – stood at 86.5 points, down 10 percent from its reading in September the year prior.

Although consumer sentiment has continued on a downward trajectory for over a year, the numbers reported for months of August and September showed that declines had begun to moderate. The moderation was a bit surprising, as both months saw reports of unemployment reaching levels last seen in 2003. But a catalyst to moderating consumer sentiment has been the decline in the price of gasoline, a silver lining in the otherwise torturous third quarter.

The drop in the price of fuel has been sharp, with the average price of gasoline falling from $4.10 nationally in the week of July 13, to end September at $3.66 a gallon. Gasoline prices have continued to decline with the average price for a gallon of gas standing at $2.70 a gallon to end last week.

The return of cheaper gasoline has enabled many households to better balance their monthly budgets. Even as September saw consumer spending intentions remain weak – indicted by 63 percent of Discover’s respondents expecting to spend the same amount or less in the next month – the sharp decline in the average price of fuel has help alleviate some financial stress and given many consumers some breathing room in their monthly budgets. This in turn allowed for moderate improvement in the perception some consumers held of their own personal financial situations.

But cheap gas alone wasn’t able to sustain improvements in overall sentiment in the face of the major economic events of October. The Consumer Confidence index was hit hard by the financial crisis earlier this month, and plunged nearly 40 percent to an all-time low of 38 points in October.

This is in sharp contrast with what had been three straight months of modest gains for the Consumer Confidence Index, but the drop was not at all surprising as an October survey by Gallup showed that between 63 percent and 77 percent of Americans believed the financial damage done during the beginning of October would also do long-term harm. In addition, 66 percent of Americans believed that their personal financial situations had been harmed “a great deal" or “a moderate amount.”

Moving into the final two months of the year, it’s hard to gauge what exactly all this will mean. What’s certain is that the health of the job market arguably will continue to be the single largest issue facing households. Of respondents to the Consumer Confidence survey, the percent of consumers expecting fewer jobs in the months ahead surged to 41.5 percent from 26.9 percent, while those anticipating more jobs decreased to 7.4 percent from 11.9 percent.

And while unemployment figures garner the bulk of major headlines another figure that receives less attention, but is likely to become a barometer for the overall health of the job market, is the part-time employment number.

With little fanfare, in the past several months underemployment has managed to whittle at both consumer confidence and household budgets. In September alone an additional 337,000 people fell into the category of those who would like to work full-time but were working part-time because their hours had been cut back or because they were unable to find full-time jobs. The number of persons who were working part-time rose to 6.1 million, an increase of 1.6 million over the past 12 months.

All else aside, without some marked improvement in the job market, spending — on both discretionary items as well as spending to pay down outstanding debts — will continue to wane.