Confidence Tumbles Risking Slowdown

U.S. Economy: Confidence Tumbles Risking Slowdown (Update1)

By Shobhana Chandra and Timothy R. Homan

July 16 (Bloomberg) -- Confidence among U.S. consumers tumbled in July to the lowest level in a year, heightening the risk of a slowdown in economic growth.

The Thomson Reuters/University of Michigan preliminary index of consumer sentiment decreased to 66.5, the lowest since August and less than the most pessimistic forecast of economists surveyed by Bloomberg News. Another report showed inflation cooled last month.

The sentiment figures showed a record-low share of Americans expected their incomes will rise in the next 12 months, underscoring growing pessimism over employment prospects. Declining confidence may further restrain consumer spending, which accounts for 70 percent of the economy, and hinder the recovery in coming months.

“It feels like a wipeout all of a sudden,” said Jonathan Basile, an economist at Credit Suisse in New York who had the lowest forecast in the Bloomberg survey. “We’ve basically wiped out all the gains we’ve had for some time. It builds the case for moderate growth in consumer spending in the second half.”

Stocks dropped after the report, extending early declines triggered by lower-than-estimated revenue at General Electric Co. The Standard & Poor’s 500 Index dropped 2.4 percent to 1,070.69 at 12:22 p.m. in New York. The S&P Consumer Discretionary Index, which includes Home Depot Inc. and Comcast Corp., fell 3 percent.

Range of Estimates

The estimates for the confidence measure ranged from 71 to 78, according to the survey of 62 economists. The 9.5-point decline from June’s final reading of 76 was the biggest since October 2008.

Second-quarter sales at stores open at least a year were unchanged at Yum! Brands Inc., the owner of Taco Bell, Pizza Hut and KFC restaurants, because of a “challenging consumer environment” in the U.S. Rising overseas demand prompted the Louisville, Kentucky-based company to raise its annual profit forecast.

“In the U.S., we are still facing sustained unemployment and a concerned U.S. consumer,” Richard Carucci, chief financial officer, said on a conference call with investors on July 14.

More than 7 out of 10 Americans believed the economy is mired in recession, according to a Bloomberg National Poll conducted July 9-12. Just 1 in 6 believed they are personally better off than they were 18 months ago, when President Barack Obama took office.

Inflation Cools

A report from the Labor Department showed consumer prices fell 0.1 percent in June, a third consecutive decrease. The decrease brought the gain in the cost of living over the past 12 months down to 1.1 percent from 2 percent in the year ended May.

Costs of goods and services excluding food and energy were up 0.2 percent, more than forecast and the biggest gain since October.

The report showed rents, the biggest component of the consumer-price index, stabilized, while the cost of clothing and used cars climbed, diminishing the risk of deflation, or a protracted drop in prices. The lack of inflation gives Federal Reserve policy makers scope to leave the benchmark interest rate near zero in coming months to help reinvigorate the economy.

“Inflation will be tame because there is so much slack in the economy, but this number should lessen deflation fears somewhat,” said James O’Sullivan, chief economist at MF Global Ltd. in New York.

Sentiment Breakdown

The Michigan report’s gauge of current conditions, which reflects Americans’ perceptions of their financial situation and whether it is a good time to buy big-ticket items like cars, fell to an eight-month low of 75.5 from 85.6 in the prior month.

The index of consumer expectations for six months from now, which more closely projects the direction of spending, dropped to 60.6, the lowest since March 2009, from 69.8.

The share of consumers anticipating income gains during the coming year dropped to 39 percent, the lowest on record. Three of four Americans surveyed said they expected no decline in unemployment in the next 12 months.

Retail sales fell in June for a second month, a Commerce Department report showed this week. Target Corp., the second- largest U.S. discount chain, reported a June same-store sales gain that included strong demand for food and clothing and “particularly soft” purchases of electronics and music.

Government Policy

Today’s sentiment report also showed confidence about the government’s economic policy fell to the lowest level since the start of the Obama administration. The proportion that said economic policies were unfavorable rose to 42 percent in July, almost twice the low of 22 percent in May 2009, the report said.

Consumers in the survey said they expect an inflation rate of 2.9 percent over the next 12 months, compared with 2.8 percent in June.

Over the next five years, the figures tracked by Fed policy makers, prices were projected to climb 2.9 percent compared with 2.8 percent the prior month.

Economists trimmed projections for 2010 consumer spending to an average 2.4 percent from 2.5 percent predicted in June, according to a Bloomberg survey taken July 1 to July 8. They forecast the jobless rate, which reached a 26-year high of 10.1 percent in October 2009, will average 9.6 percent this year.

One source of relief for households is fuel prices. The cost of regular unleaded gasoline averaged $2.72 a gallon at the pump in the first half of July, unchanged from the June average, according to AAA.