Consumers Spooked by Stock Market Drop

Consumer confidence was knocked off a 2 1/2 year high in March as a recent swoon in worldwide stock markets made people feel less secure about the economy's prospects and their own financial fortunes.

The decline also comes as the national economy is undergoing a sluggish spell, while gasoline prices are spiking. Concerns also persist about the depth of the housing slump. All of these things have implications for peoples' pocketbooks.

Consumer confidence sank to a three-month low of 92.3, according to the RBC Cash Index. That represented a steep slide from the fairly buoyant reading of 103 in early February, which had marked the best showing since the autumn of 2004. The index is based on the results of the international polling firm Ipsos.

"Consumers were clearly spooked by the stock market correction. The stock market drop was all over TV, in the newspapers. It sent out a message of panic," said Richard Yamarone, economist at Argus Research.

CNBC's Jim Goldman interviewing the "Zooomr" group.
CNBC's Jim Goldman interviewing the "Zooomr" group.

Given that, economists breathed a sign of relief that confidence didn't deteriorate more over the month. The reading of 92.3 in March was still better than the same month last year when the index stood at 86.2.

Information for the new confidence reading was taken this week _ after the Feb. 27 nosedive in global financial markets, when the Dow Jones industrials plunged 416 points, the most in more than five years.

Investor anxiety reflected numerous fears: economic slowdowns in the United States and China; problems with risky mortgages infecting the broader mortgage market and the U.S. financial system; former Federal Reserve Chairman Alan Greenspan warning of a possible U.S. recession this year.

Against this backdrop, consumers expressed even more angst about how economic conditions and their own financial situations will develop over the next six months. The expectations measure tumbled to 49.3 in March from 69.2 in February.

The ebbing in consumer confidence comes as President Bush continues to shoulder a weak job-approval rating of 35% from the American public, according to a separate AP-Ipsos poll. On the economy, 41% approve of the president's stewardship, while 57% disapprove. Democrats are trying to capitalize on that weakness by championing policies aimed at helping the middle class and unions.

Economists keep close tabs on confidence readings for clues about consumer behavior. Consumer spending is a major force shaping overall economic activity. So far, consumers have been spending sufficiently to keep the economy moving. At the same time, their savings rate is extremely low. If consumers were to clamp down dramatically, that could spell trouble for the economy.

Higher Gas Prices

Harold McGraw III, chief of The McGraw-Hill Companies and chairman of the Business Roundtable, an association of corporate leaders, was mostly positive about the economy's prospects but said a potential cloud would be an unexpected retrenchment by consumers. "You got a stretched consumer ... so you have to weigh that one very carefully," he said.

Peoples' feelings about current economic conditions slipped a bit to 107.5 in March, a still-healthy reading, from 114 in February.

Gasoline prices climbed in early March to $2.51 a gallon nationwide, from $2.38 a gallon at the end of February, according to the Energy Department. Gas prices have jumped above $3 a gallon in some parts of California and Hawaii.

Another index tracking peoples' attitudes about buying, saving and other investment decisions dropped to 96.5 in March, from 102.4 in the prior month.

Last week's worldwide stock sell-off along with record trade deficits and bloated federal budget deficits made people feel like "we don't have as much control over our own economic destiny as we used to and that makes people nervous," said Mark Vitner, economist at Wachovia Corp.

Consumers' feelings about the job market -- an important ingredient coloring their perception of economic security -- dipped to 128.4, from a record high of 131.9 in February.

The overall confidence index is benchmarked to a reading of 100 on January 2002, when Ipsos started the survey.

The RBC consumer confidence index was based on responses from 1,000 adults surveyed Monday through Wednesday about their attitudes on personal finance and the economy. Results of the survey had a margin of error of plus or minus 3 percentage points.