Consumers turning wary

After Katrina and gasoline ordeals, consumer confidence takes its biggest fall in 15 years.

President Bush is asking Americans to conserve gasoline by holding off on unnecessary trips.

Does that include a jaunt to the mall? A visit to a favorite restaurant?

If shoppers do stay away, most economists say it will significantly slow the nation's economic growth, which for the past several years has been fueled by the willingness of consumers to spend. But even before the president's call, some retailers say they notice consumers becoming thriftier. The penny-pinching also comes at a time of rising interest rates for credit cards and nonstop news about hurricane flooding.

The cumulative effect: Tuesday, a consumer confidence survey showed the sharpest drop in 15 years, which could foreshadow a slower growth rate in consumer spending.

"Consumers are stressed," says Anthony Chan, chief economist at JPMorgan Asset Management in Columbus, Ohio. "Consumers are at the crossroads."

Some analysts think Mr. Bush is doing the right thing by asking Americans to think about their driving habits. They argue that if shortages crop up and Americans can't get gasoline, no matter how much it costs, the the damage to the economy would be magnified.

"The consequences are more serious," says Mark Zandi, chief economist at Economy.com. "Right now there is zero margin for error. Nothing can go wrong."

Bush's call for sacrifice is reminiscent of 1977, when Jimmy Carter asked Americans to turn the thermostat down to 65 degrees F. - three degrees lower than President Nixon proposed during the Arab oil embargo.

While Bush has not gone that far, some consumer experts worry that Americans may pull back too far. "There is a risk consumers will take the president's remarks as an indication that the situation is more serious than expected," says Richard Curtin, director of consumer surveys at the University of Michigan.

Tuesday, some of that concern was reflected in the Conference Board's consumer confidence index for September, which dropped 19 points. "This was reflecting the gasoline prices and all the human lives lost to Katrina," says Gad Levanon, an economist at the Conference Board, a business research organization. "We think it will fade away to some degree in the next several months."

The survey results mirror those at the University of Michigan, which has seen the steepest fall in confidence ever. "I think their concern will be heightened by the president's affirmation," says Mr. Curtin. "They will pull back in general on all types of spending."

However, experts say drops in consumer confidence don't always portend a fall in consumer spending. "There is a danger in looking at one indicator and trying to predict consumer behavior," warns Scott Krugman, a spokesman at the National Retail Federation in Washington. But he adds, "You can't ignore that kind of drop."

The change in consumer confidence follows a warning from Federal Reserve Chairman Alan Greenspan that links consumer spending with borrowing against home appreciation. In a speech to bankers, Mr. Greenspan said such borrowing added $600 billion to consumers' pocketbooks last year. "Survey data suggest that approximately a fourth to a third of the value of home-equity loans and cash-outs finances personal consumption expenditures directly," he said. A reversal in this borrowing might help the savings rate, he says.

Some retailers admit to being worried by changes in consumer behavior. In Morris, Ill., Baum's Inc., a woman's apparel store, is already seeing poor store traffic and lower average sales. "The consumer is very uncomfortable right now," says H. James Baum, president.

Mr. Baum, who says he sides with Republicans on most issues, is unhappy with the president's message. "Bush has pushed me over the edge," he says. "The free market works real well."

However, in Miami, retailer Lesley Tobin, owner of Lesley Clothing, says her upscale, mostly female clientele are continuing to shop, regardless of gasoline prices. Her store is located in a small shopping center in Coconut Grove. "I am a destination store," she says. Bush's request to drive less is not affecting her yet. "I have three customers in my 600-square-foot store right now," she said Tuesday morning.

However, some Americans have started to change their ways. In Bethlehem, Pa., Joyce Danko has stopped taking pleasurable Sunday drives. "I'm a person who loves to drive," says Ms. Danko, who tools around in a Mini Cooper. "I've already changed my lifestyle a little bit."

In Hinsdale, Ill., Stephanie Simmons no longer just hops in the car to do an errand. "I'm mindful of our route and try to combine errands into one trip," she says. After gasoline prices went over $3 a gallon, she also started driving her Volkswagen Passat without the air conditioning. And she says, her family is considering buying a hybrid.