WASHINGTON - Consumer confidence slumped unexpectedly in October, according to a report yesterday, which analysts said raises questions about the staying power of the recent trend toward stronger consumer spending,
The Conference Board, a private research group based in New York, said that its consumer confidence index fell 4.4 points to 59.4 in October, the biggest drop in five months, which erased the 4.5 point gain the index registered in September.
Economists generally had expected the index to post another gain in October. The index increased to 63.8 in September, the first time it popped above 60 in four months.
"It's obviously troubling," said Anthony Karydakis, senior financial economist of First Chicago Capital Markets Inc. "It reflects no prolonged improvement in confidence and raises questions about the sustainability of the consumer-led expansion."
The index is based on two components: one measures consumer sentiment about current conditions; the other measures future expectations. The October decline resulted entirely from a deterioration in future expectations, while the current situation component was unchanged.
"There continues to be little in recent consumer confidence survey readings to suggest that a significant improvement in the economy is likely in the immediate months ahead," said Fabian Linden, executive director of the Conference Board.
However, several other recent economic reports indicated that growth picked up notably in the third quarter, prompting many analysts to expect stronger growth in the second half of the year.
"I was a little surprised that it was weaker rather than stronger," said Sally Kleinman, an economist with Chemical Securities Inc. She said the current sentiment component, which has been improving gradually for many months, is probably a better gauge of general consumer confidence than the overall index.
The index has hovered in historically low levels for several months despite a rebound in consumer spending, topped off with a surge in auto sales this month. "We need to watch what consumers do and not what they say," Kleinman said.
Both Kleinman and Karydakis predicted that consumer spending will remain relatively strong through the rest of the year, despite the slump in confidence.
"The consumer is not falling apart," Karydakis said, though he said he is concerned that an upward trend in confidence has not materialized. Nonetheless, he predicted the overall confidence index will drift upward in the remaining months of the year.
Kleinman said she expects the index to hold steady or rise slightly in the fourth quarter as consumers' outlook continues to improve on current conditions, despite their dismal outlook on the future.
Henry Willmore, an economist with Chase Manhattan Bank, said he was not disturbed by the October decline in the confidence index.
Citing recent strong home and auto sales, Willmore said the confidence index has lost its ability to predict future consumer spending. "Historically, it has had some predictive power for consumption," he said. "It's utterly worthless now."
On Friday, the Commerce Department will report consumer spending in September. Last month, the department said spending pined 0.4% in August, its fifth straight pin. Consumer spending accounts for about two-thirds of total gross domestic product.
The confidence index, based on a survey of 5,000 households, has fallen more than 17 points since January, according to the Conference Board. "In looking ahead to the next six months, almost three times as many survey respondents fear that there will be fewer jobs as the number that anticipate more jobs," the group said.