Consumer confidence index drops in August

MacroMarkets LLC Chief Economist Robert Shiller, an architect of that report, said the declining residential real estate market “shows no signs of slowing down.”

The consumer confidence survey from the Conference Board is based on a representative sample of 5,000 U.S. households to measure consumer sentiment on present economic conditions and the spending outlook for the next six months. The index was based at 100 in 1985.

After five years of rapidly rising prices, the housing market has stalled as consumers who borrowed at adjustable rates find it difficult to meet monthly payments that spiked and a growing number of homes have fallen into foreclosure. Lenders have tightened credit standards making it harder for potential home buyers to obtain a loan and for homeowners with shaky credit to refinance.

The problems seeped into the broader market as the value of investments backed by mortgages plunged sending stocks on a volatile ride for several weeks, until calming somewhat when all three major indices rose last week — the stock market’s strongest in a month.

Stocks fell Tuesday. Minutes from the Aug. 7 Federal Open Market Committee meeting failed to reassure investors the Fed will definitely cut interest rates to calm the market. According to the minutes, the committee held out hope for “a return to more normal market conditions” without any intervention.

Ten days later, the Federal Reserve stepped in by lowering the interest rate it charges banks for loans, and it has pumped billions of dollars into the U.S. financial system to alleviate any cash-flow problems.

Economists and investors believe the odds are rising the Fed will lower the interest rate banks charge each other on overnight loans, its main tool for influencing overall economic activity, on or before its Sept. 18 meeting.

In late afternoon trading, the Dow fell 190.21, or 1.43 percent, to 13,131.92. Broader stock indicators also fell. The Standard & Poor’s 500 index lost 24.34, or 1.66 percent, to 1,442.45, and the Nasdaq composite index shed 44.23, or 1.73 percent, to 2,517.02.

While investors watch the Fed, policymakers have their eyes on the markets. Fed policymakers will be able to digest readings on manufacturing, jobs and retail sales before their next scheduled meeting, but they are most closely monitoring financial markets, economists said.

“We think the Fed is concentrating on financial market confidence, rather than the economy, which looked pretty good going into the credit problems,” said Adam York, an economic analyst at Wachovia Corp. in Charlotte.

So far, a strong economic picture, outside the housing woes, is keeping many economists upbeat about spending trends. U.S. consumers are in the midst of the back-to-school shopping season and will soon gear up for holiday shopping in November and December.

“We have certainly pulled back consumer spending expectations in the third and fourth quarters,” York said. “We don’t expect a disastrous holiday season by any means, but we expect a moderation by some degree.”

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