Business gurus warn of US recession

US consumers may not be able to see off recession for long

The sentiment of US shoppers has taken its biggest plunge in more than a decade, pushing the economy ever nearer recession, an influential business group has warned.

Consumer confidence as measured by economy watchers at the Conference Board has slumped to an index rating of 97.6, from 114.0 in August.

While consumers have managed to keep the US out of a recession for several years now, that soon may no longer be the case

Lynn Franco, Consumer Board

The fall was the biggest since October 1990, at the start of the last recession and in the middle of the Gulf crisis after Iraq invaded Kuwait.

Conference Board researchers said the fall partly reflected gloom stemming from the terrorist attacks two weeks ago, with data collected before and after the atrocities differing "slightly".

'Tougher times'

But the board blamed underlying economic factors for driving the downturn in sentiment.

"The further erosion in confidence continues to be fuelled by deteriorating labour market conditions and weakening business conditions," Tuesday's report said.

And with US unemployment rising, and the ongoing after-affects of the terrorist attacks to contend with, sentiment is only likely to sour further, the board's consumer research chief Lynn Franco said.

"As the economic ramifications of [the attacks] continue to reverberate... and the number of layoffs continue to rise, the economy faces tougher times ahead," she said.

Recession warning

The collapse of consumer confidence, which analysts have seen as a key prop to the flagging US economy, increases the likelihood of recession, she warned.

"While consumers have managed to keep the US out of a recession for several years now, that soon may no longer be the case."

The proportion of US consumers predicting that business conditions will worsen over the next six months rose from 10.7% to 15.0%.

Wall Street analysts said that the fall would increase the pressure on the Federal Reserve, the US central bank, to cut interest rates further.

"I think it will keep the Fed worried that consumer spending could falter," said Jade Zelnik, chief economist at Greenwich Capital Markets.

"It will keep [the Fed] on track to cut aggressively again."

Mixed signals

The board's report was published minutes after Instinet Research revealed that its retail index, compiled weekly from a survey of 9,000 stores, fell 2.2% in the first three weeks of September compared with the same period last year.

Don Evans: Forecast deeper downturn, but sharp recovery

And US Commerce Secretary Don Evans said the terrorist attacks may be leading to a deeper downturn than had been previously expected.

"I think one can make a valid case there," Mr Evans said.

But he also said that factors such as falling oil prices represent causes for optimism about the US economy, which he predicted would rebound sharply.

Market reaction

Monday's reports failed to overcome improving sentiment on US stock markets, where bargain hunters again stepped in after last week's heavy falls in share prices.

The benchmark Dow Jones industrial average index closed 56 points higher at 8,659.