Consumer confidence declined again in October after a substantial plunge the previous month, pushing the confidence index to its lowest level in 13 years, and home buying attitudes fell to their lowest level since 1990, according to the University of Michigan’s Survey of Consumers.

“The continuing decline in October was due to the cumulative strain of higher prices on the financial situation of consumers,” said Richard Curtin, the director of the university survey.

“The current outlook for higher costs of home heating, higher interest rates and falling real incomes will cause cutbacks in consumer spending in the coming months,” noted Curtin. Based on the survey data, Curtin expected the growth rate in real consumption spending to be about 1 percent in both the fourth quarter and in the first quarter of 2006.

The index of consumer sentiment was 74.2 in the October 2005 survey, down from 76.9 in the prior month and 96.5 three months ago. The three-month decline of 22.3 index-points was the second largest on record. The largest decline (-24.2 index-points) was associated with the 1990 recession; somewhat smaller three-month declines were recorded prior to the 2001 recession (-17) and the 1980 recession (-15.2). The largest three-month decline that did not result in recession was 11.3 index points following the 1987 stock market crash.

The index of consumer expectations, a closely watched component of the index of leading economic indicators, was 63.2 in the October survey, just below the 63.3 in September, but well below the 85.5 recorded three months ago. The three-month decline of 22.3 was the second largest in the survey’s history; the largest was the 26.4 index-point decline associated with the 1990 recession.

A pause in the pace of the downward decline is typical of past recessionary episodes. The pause reflects a period of time when consumers attempt to gauge the true extent of the weakness in the economy, and thus determine how they should revise their expectations.

Higher prices have devastated consumers’ financial situation. More than one-third of all consumers reported that their finances had worsened in the October survey.

“When consumers were asked to explain their situation, more consumers cited higher prices than any time since 1982, and just as importantly, the fewest consumers cited income gains in more than a decade,” Curtin said. Moreover, consumers expected the smallest financial gains in more than a dozen years.

Favorable home-buying attitudes fell to their lowest level since 1990, with more consumers complaining about high home prices than any time since 1982.

Vehicle-buying attitudes fell to their lowest level in a dozen years, with more consumers citing high gas prices than any time since the late 1970s. Disappearing price discounts and heightened uncertainty about future job and income prospects were the main reasons given by consumers for their lower buying plans for furniture, appliances, home electronics and other household durables.


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