Consumer spending sentiment declined for the third straight month as fears about the government shutdown caused buyers' confidence to drop 2.3 points in October, reaching its lowest level since January, according to a survey published on Friday.
Overall consumer confidence decreased from 77.5 in September to 75.2 in October, according to the Index of Consumer Sentiment published by Thomson Reuters and the University of Michigan. The economic expectations index in the survey also fell from 67.8 in September to 63.9 for October, reaching the lowest level so far this year as consumers reported less optimism about the course of the economy for the next 12 months.
The U.S. Census Bureau did not publish its monthly retail survey this week because of the government shutdown.
The Reuters/Michigan survey does not reflect a weak economy so much as it reflectsa lack of confidence in politicians in Washington to resolve their differences, get the government back open and avoid a default on the government's debt obligations, says Chris Christopher, an economist at IHS Global Insight. He predicts consumer sentiment will remain low as long as the shutddown continues.
The consumer sentiment index on the survey declined by 25 percent in one month in August 2011 when the country last reached the edge of the federal debt ceiling, but markets are not panicking as sharply this time, Christopher says. But, suggesting some volatility, the Dow Jones Industrial Average did spike more than 300 points Thursday after various reports of a deal in the works between the GOP and President Obama. That may have been premature, but the two sides did agree to further talks after a meeting at the White House. Treasury Secretary Jack Lew has said the government will reach its debt ceiling by Oct. 17.
"I think this time markets are used to it and they are thinking 'somehow we will get through this," he says.
IHS projects consumer spending will grow 1.9 percent this year, under the assumption that the government shutdown will end in time to avert a debt ceiling crisis, Christopher says. If the U.S. did default on its debts, even temporarily, many economists believe that would lead to higher interest rates in numerous sectors including mortgages, credit cards and auto loans.