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Last Updated: Friday, 16 September 2005, 16:12 GMT 17:12 UK
US consumer confidence plunges
Shop owner paying dollar bills into a till
The US economic recovery needs consumers to keep spending
US consumer confidence has plunged to its lowest level in more than a decade after Hurricane Katrina hit the Gulf coast, causing death and destruction.

The University of Michigan index slid to 76.9 this month, down from 89.1 in August and below levels it hit after the 11 September, 2001, terror attacks.

Consumer spending is the main driver of the US economy, the world's biggest.

The concern is that consumers will rein in their spending, slamming the brakes on economic and profit growth.

"These are abysmal numbers, suggesting a deeply pessimistic consumer in the first half of September," said Christopher Low of FTN Financial.

Reports on Thursday showed Katrina already was having a significant effect on the job market with 68,000 people signing on for unemployment benefit as a direct result of the storm.

Uncertainty about the state of the job market will result in further dents to consumer confidence, analysts said.

Sugar coating?

It is estimated that Katrina will knock about half a percentage point off US growth this year, slowing it to about 3% from earlier forecasts of 3.5%.

Consumer spending accounts for almost two-thirds of the US economy and there had already been signs that consumers could be losing their appetite for shopping.

A report from the Commerce Department on Thursday showed that retail sales tumbled by a larger-than-expected 2.1% in August.

However, analysts said it may be too early start ringing alarm bells.

While the figures are not great, the reaction to disasters tends to be extreme but relatively short-lived.

Wall Street still continued to climb after the Michigan report was released, with observers saying that a dip in the price of gasoline would go a long way to buoying consumers' spirits.

Capital Economics said that the reaction to events such as the Iraq war and 2001 World Trade Center attacks, gave it confidence that a turn around was likely.

"Nonetheless, there is only so much sugar coating we can offer," the company said in a note to investors.

"The bottom line is that confidence has obviously been hit harder than was generally expected."

"Now we have to wait and see if the drop in confidence translates into lower spending."


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