Looming war in Iraq and rising layoffs battered U.S. consumer sentiment to its lowest level in more than a decade in early March.

The University of Michigan consumer sentiment index, released Friday, dropped to a much weaker-than-expected 75.0, from 79.9 in February, the lowest level since September 1993. Consensus expectations were for a reading of 78.

RBC notes that the present conditions sub-index dropped from 95.4 in February to 87.1 in March, while the forward looking expectations sub-index dropped by a more modest 2.7 points to 67.2. “All three major confidence surveys — the others being done by the Conference Board, and the ABC News/Money Magazine report — are posting disturbing collapses. Rising energy prices, weakness in equity markets, and rapid job destruction are all highly related to the uncertainty over policy in the Middle East and are weighing down heavily upon business and consumer attitudes with negative implications to near-term growth,” it says

While it was on consensus, it was still not encouraging to see the U.S. current account deficit coming in at US$136.9 billion. RBC says, “The bad news is that this is a new record level deficit that stands at 5.3% of GDP for the quarter. For 2002 as a whole, a whopping half-trillion dollar current account deficit was posted.”

The firm also notes that the capital account surplus – the net two-way total of cross-border capital flows – came in at US$144.1 billion for the quarter from US$169.6 billion in the previous quarter. “The result is such that the U.S. is selling off assets to foreigners that are funding its record current account deficit at a more and more rapid pace. Foreign assets owned by U.S. residents increased by US$39 billion, but U.S. assets owned by foreigners increased by US$183 billion,” it says. “Nevertheless, a depreciating U.S. dollar against its trading partners suggests that foreigners are not as willing to fund U.S. trade and current account deficits to the degree they once did so currency and financial asset prices suffer accordingly. The risks of balance of payments adjustments are magnified within the context of the market’s shift over the past few months towards projecting growing federal government budgetary surpluses towards large and growing budgetary deficits.”

“Furthermore, large current account deficits are only adding to the insular feelings within U.S. political circles that are being derived from foreign reactions to U.S. policy in the Middle East. At times such as this, protectionist sentiments in Congress often become more significant risks to trading partners of the United States, and hence to their own growth prospects,” RBC warns.

Current account news release
http://www.bea.doc.gov/bea/newsrel/trans402.htm