Job cuts and falling share prices hit US confidence

Confidence among US consumers suffered its largest fall since the aftermath of the 11 September terrorist attacks, a key survey showed yesterday.

The drop in optimism came as the Federal Reserve began its two-day meeting to decide whether to alter US interest rates, which are at a 40-year low of 1.75 per cent.

The report from the Conference Board blamed mounting job cuts and falls in stock prices for the drop in confidence. The percentage of people who said jobs were hard to get increased to a six-year high.

"Weak labour markets, generally soft business conditions and waning public confidence in questionable business practices have helped erode consumer confidence," said Lynn Franco, the director of the Conference Board's consumer research centre.

However, she said that consumers' expectations of future developments were still upbeat, pointing to "continued consumer spending and moderate economic growth".

The four-point fall in its main index, which was the largest since October last year, joined a welter of evidence indicating that the Fed would not raise rates later today.

Paul Ashworth, an international economist at Capital Economics in London, said: "This reinforces our belief that improvement is still some way off ... and it is unlikely rates will rise before the end of this year."

Recent data showing weak retail sales in May raised worries among economists that consumers could undermine the tepid recovery by reining in spending.

On Wall Street, the broad S&P 500 index, which has lost about 9 per cent over the past five weeks, jumped 1 per cent after the survey was published, as the markets focused on the positive outlook for consumer spending. But the rally ran out of steam, leaving the S&P down 16.6 at 976.1 following another slew of profit warnings. The Dow Jones Industrial Average ended down 155 at 9126.8.

Ian Morris, the chief US economist for HSBC, said: "This report could have been a lot worse. Although confidence fell, the Fed may be relieved that it did not fall by more, given the equity woes."

The fall in confidence was mirrored in Germany, where the key index of business optimism suffered an unexpected drop. The Ifo economic institute said its index, based on a monthly survey of about 7,000 companies fell to 91.3 from 91.6 in May. The consensus forecast was for a rise to 91.9.

"The decline was exclusively due to the no longer quite so favourable expectations for the next six months. However, the view of current trading conditions has improved," Ifo president Hans-Werner Sinn said.

Analysts said the report would further undermine hopes that the euro area was on the brink of a pronounced recovery.