Consumer Sentiment Plunges to 4-Month Low as Food Prices Spike

Friday, 18 Jul 2014 10:45 AM

 

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Consumer confidence in the U.S. unexpectedly declined in July to a four-month low as Americans’ outlook for the economy dimmed.

The Thomson Reuters/University of Michigan preliminary index of sentiment dropped to 81.3 this month from 82.5 in June. The median projection in a Bloomberg survey of 68 economists called for a July reading of 83.

Higher prices at grocery store checkout lines are souring attitudes and straining household budgets as they take a bigger bite out of workers’ paychecks. Absent a pickup in wage growth, a higher cost of living raises the risk that consumer spending, which accounts for almost 70 percent of the economy, will cool.

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“It’s a steady picture — the consumer is optimistic but not getting too carried away,” Sean Incremona, senior economist at 4Cast Inc. in New York, said before the report. Higher wage gains would provide “the big boon” for the consumer, he said.

Another report showed the Conference Board’s index of leading economic indicators climbed 0.3 percent in June after a 0.7 percent May increase that was stronger than initially estimated.

Stocks rose, following the biggest drop since April for the Standard & Poor’s 500 Index, as Google Inc. advanced and concerns eased over crises in Ukraine and the Middle East. The S&P 500 climbed 0.4 percent to 1,965.21 at 10:16 a.m. in New York.

Estimates for the Michigan sentiment gauge in the Bloomberg survey of economists ranged from 80 to 85.2. The index averaged 89 in the five years before December 2007, at the beginning of the last economic slump, and 64.2 during the recession.

Bloomberg Sentiment

Friday’s figures corroborate the Bloomberg Consumer Comfort Index. The monthly gauge on consumer expectations of the economy dropped to 46 in July from 48.5 the prior month, which was the highest in a year. The weekly index of confidence held near a 2014 peak, figures showed. The measure of the state of the buying climate climbed to its second-highest reading in more than six years.

The Michigan sentiment survey’s measure of expectations six months from now decreased to a four-month low of 71.1 from 73.5 the prior month. The current conditions index, which measures Americans’ assessment of their personal finances, rose to 97.1 this month from 96.6 in June.

Americans expect an inflation rate of 3.3 percent over the next year, compared with 3.1 percent in the prior month. Over the next five to 10 years, they anticipate a 2.6 percent rate of inflation, compared with the 2.9 percent expectation posted in June.

Auto Sales

Recent figures show households are sustaining spending. Cars and light trucks sold at a 16.9 million annual pace in June, the strongest since July 2006, according to Ward’s Automotive Group. Deliveries at General Motors Co. and Ford Motor Co., the two largest U.S. automakers, exceeded analysts’ estimates.

A Commerce Department report this week showed retail sales climbed 0.2 percent in June as department stores, clothing outlets and Internet retailers led a broad-based advance.

Demand is being underpinned by progress in the labor market. Payrolls rose 288,000 in June, according to Labor Department data. Employment is on pace for the biggest annual gain since 1999.

Companies are also cutting back on dismissals as well. The number of Americans filing applications for unemployment benefits unexpectedly dropped to a two-month low of 302,000 last week, the Labor Department said.

Income Growth

Even with the pickup in hiring, worker pay increases have been more subdued. Hourly earnings for production workers have increased 2.1 percent year-over-year on average since the recession ended in June 2009, compared with 3.1 percent in the previous expansion.

Faster income growth would help ease the burden of higher prices. The cost of living, as measured by the consumer price index, rose 2.1 percent in May from the same month last year, the biggest increase since October 2012. Food costs in May climbed 0.5 percent from the prior month, the most since August 2011.

“It’s still pretty tough out there,” Howard Levine, chairman and chief executive officer at Family Dollar Stores Inc., a Matthews, North Carolina-based chain of budget stores, said on a July 10 earnings call. “The low-end consumer has not benefited in this recovery at all. The government cutbacks continue. There’s quite a bit of health care uncertainty. Coming from this unbelievably cold winter, heating prices, heating oil and gas prices are moving upwards. So, it’s a tough playing field out there.”

Federal Reserve

A pickup in hiring and falling unemployment are among reasons Federal Reserve officials are reducing monthly asset purchases as they plan to bring an end to the monetary stimulus program by the end of the year.

At the same time, Fed Chair Janet Yellen told lawmakers this week that rates will probably stay low for a “considerable period” after the central bank halts bond purchases, most likely in October.

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