Oil remains wild card for consumer confidence

By SHIHOKO GOTO, UPI Senior Business Correspondent  |  March 29, 2005 at 1:11 PM
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WASHINGTON, March 29 (UPI) -- Well over three years since the terrorist attacks on U.S. soil and two years after the United States invaded Iraq, it appears that neither foreign policy nor terrorism loom large on the minds of business executives, consumers, and economic policymakers alike.

No longer does the Treasury Department or the Federal Reserve caution loudly about the sharp blow another terrorist strike would have on the U.S. economy. Meanwhile, shoppers rarely cite fear of another attack keeping them from opening up their wallets. Pushing back the memories of 9/11 into history books and only remembering from time to time that there is still a war going in Iraq have undoubtedly been good for businesses as consumers are more able to shop guilt-free.

But as oil prices continue to climb and with most analysts declaring the end to the decades of cheap energy, concerns about petroleum costs hurting the bottom line are on the rise, and it's certainly already adversely affecting how people feel about spending money.

In its monthly survey of 5,000 U.S. households, the Conference Board reported Tuesday that its key consumer confidence index fell to 102.4 in March from 104.4 in February. The latest reading was below the Wall Street consensus of 103, and the New York-based private research group said that one key factor for the decline was rising energy costs.

But while the board's director of consumer research Lynn Franco said that consumer spending would remain on track as the job market continued to improved, others weren't so certain.

"Ebullience is fading," said Joel Naroff, chief economist of Naroff Economic Advisors, adding that "there is a touch of uncertainty settling into consumer thinking." He argued that while consumer confidence remains relatively steady, "it appears that there is a bifurcation in the population developing as the economic winners and losers are growing."

There certainly does seem to be a growing divide between those who are doing well under current economic conditions and those whose financial circumstances are dwindling. The Conference Board found the number of those who found business conditions to be "good" increased to 25.8 percent from 24.6 percent the previous month, but at the same time, the number of those who found that conditions are "bad" also increased to 16 percent in March from 15.7 percent in February.

Likewise, there is a rift between those who are finding the job market to be improving and those who find the situation is getting worse. The board found that while the number of respondents who found jobs are "hard to get" rose to 23.8 percent from 22.4 percent, the number of those stating that jobs are "plentiful" too rose to 21.3 percent from 21.1 percent.

As for the outlook of confidence among U.S. households, 19.2 percent said that business conditions will improve over the next six months, compared to 17. 9 percent in February. But as in the case of current financial conditions and employment situations, the number of those who believe that business conditions will deteriorate in six months' time too increased to 8.2 percent from 7.8 percent.

Certainly, if gas prices at the pump continue to increase, consumer sentiment will be adversely affected, which is an issue even the Federal Reserve is concerned about.

In announcing its decision last week to raise interest rates yet again by 25 basis points to 2.75 percent, the Fed warned that higher energy costs could increase inflationary pressure. Moreover, the central bank suggested that should inflation creep up too fast, it would be prepared to raise interest rates more aggressively.

Of course, if energy prices were to continue increasing, then it would not only make it more expensive for manufacturers to produce goods, it would also eat up more of a household's spending budget to keep the car running and homes heated. Moreover, higher energy costs mean that businesses may eventually have no choice but to mark up prices on their goods in order to maintain a profit, something that they have not yet had to do amid tight global competition. For households, higher energy prices would leave less room to spend on other items.

But should overall prices rise, then the Fed would have no choice but to raise rates, which in turn would make it more expensive for businesses and individuals not only to borrow money, but also to service their existing debts.

Such a cycle of higher prices and higher interest rates would undoubtedly lead to a further decline in consumer confidence, leaving energy prices the single biggest wild card in determining the economy's outlook in coming months.

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