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Consumer Sentiment Index ??“ Worrisome Decline

Consumer Sentiment Index ??“ Worrisome Decline

The University of Michigan Consumer Sentiment Index fell to 80.9 in October from 83.4 in September. The preliminary reading for October was 82.0. The level of the index is below the low seen in the 2001 recession (excluding readings associated with the declaration of war in Iraq (March 2003), Hurricane Katrina (September - October 2005) and sharp gains in oil prices (May 2006). Oil prices have once again staged a sharp upward trend and the economy is significantly weaker now compared with 2006. The Current Economic Condition Index dropped to 97.6 (preliminary estimate was 98.2) from 97.9 in September. The Expectation Index declined to 70.1 from 74.1 in September.

The Conference Board??™s Consumer Confidence Index is scheduled to be published on October 30. Consumer sentiment indexes are not tied closely to consumer spending but it is included in the set of indicators the Fed watches closely. The policy statement accompanying the surprise Fed easing on January 3, 2001 the Fed noted that, "actions were taken in light of further weakening of sales and production, and in the context of lower consumer confidence, tight conditions in some segments of financial markets, and high energy prices sapping household and business purchasing power." Several of these aspects of the economy are prevalent today.

Homeowner Vacancy Rate Close to Record High, Homeownership Rate Declines

In the third quarter, homeowner vacancy rate ("Homeowner vacancy rate" is "vacant year-round units for sale only" divided by "owner-occupied units PLUS vacant year-round units sold but awaiting occupancy PLUS vacant year-round units for sale only") was 2.7%, up from 2.6% in the second quarter and close to record high of 2.8% in the first quarter. Rental costs should show a significant moderation given the sharp increase in the vacancy rate.

The homeownership rate, the percentage of households that own their homes, dropped to 68.1% in the third quarter, down from the peak reading of 69.3 in the second quarter of 2004. The third quarter decline in the homeownership rate marks the fourth consecutive quarterly drop, the longest string of declines since record keeping began in 1980. If there is a continued reduction of homeowners as foreclosures climb, the market for home sales will suffer an extended setback.