Attacks 'spoiled US factory revival'

US consumers are expected to focus more on saving than spending

The terrorist attacks on the US have sent consumer sentiment tumbling, and may have snuffed out a recovery among America's manufacturers, analysts have warned.

The University of Michigan has, in its latest influential retail report, found that consumer sentiment slumped by a sufficient level last month to make recession a certainty.

It does show that before the attacks, the factory sector was in process of bottoming out

Jade Zelnik, Greenwich Capital Markets

The report came minutes after data from the National Association of Purchasing Managers found that factory activity dipped only slightly in August, raising hopes of an end to the sector's downturn.

"It does show that before the attacks, the factory sector was in process of bottoming out," said Jade Zelnik, senior economist at Greenwich Capital Markets.

However, with consumer sentiment on the wane, an imminent recovery among manufacturers now looked unlikely, Ms Zelnik said.

"If, as is widely expected, consumer spending starts to contract, then that will reverberate back to the factory sector," she added.

Recession fears

The University of Michigan report found that, while consumers' first response to the attacks was one of resilience, that determination soon slipped away.

"The initial reaction of consumers [to the attacks] was to reassert their confidence, but they quickly concluded that the repercussions of the terrorist attack would significantly harm an already weakened economy," survey chief Richard Curtin said.

For September as a whole, consumer confidence as measured by a university index fell to 81.8 points compared with 91.5 points a month before, and 106.8 in September 2000.

Spending is now set to decline throughout early next year, as apprehension over the economic implications of an extended war encourage Americans to boost savings, Monday's report said.

"A recession is no longer in doubt," Mr Curtin said.

"The only issue is how long the downturn will last."

Earnings boost

In August, consumer spending rose by 0.2% for the second successive month, according to figures from the US Commerce Department.

Many analysts credited the rise, which failed to match Wall Street forecasts, on the impact of the tax cuts introduced by President George W Bush.

Disposable incomes - earnings left after taxes - surged by 1.9% during August, the biggest monthly increase since December 1993.

But the savings rate reached its highest level since November 1998, at 4,1%, dashing hopes that Americans would use the tax rebates to spend their way out of recession.

Factory slump

The NAPM's index of manufacturing activity gave yet another negative monthly reading, coming in at 47.0 in September compared with 47.9 in August.

Readings below the 50 point benchmark indicate negative growth. However, economists had expected worse, predicting the index would fall as much as 45.5.

Furthermore, figures for new orders and factory production both held above 50 for the second month in a row.

Rate cut hopes

The University of Michigan report will add to pressure on the Federal Reserve, the US central bank, to cut interest rates when it meets on Tuesday.

Analysts are predicting a cut of half a percentage point, which would bring US interest rates down to 2.5%.

"The Fed clearly remains aware of the need to bolster confidence and liquidity," said economists at investment bank Nomura.

Stock, currency and bond markets have already priced in a cut of half a percentage point, and are unlikely to respond unless the Fed disappoints them, economists said.

On Wall Street, the key Dow Jones Industrial and tech-heavy Nasdaq indexes both opened lower and continued to fall on news of the manufacturing and consumption data.

But by 1700 GMT shares had recovered most of their early losses, with the Dow Jones down 27.06 points at 8,820.50 and the Nasdaq 20.35 points lower at 1,478.45.

The dollar weakened to 91.72 euro, but strengthened against yen to 120.39 yen, bolstered by worries about the Japanese economy.