WASHINGTON/NEW YORK (Reuters) – U.S. consumer sentiment worsened sharply in early August, falling to the lowest level in more than three decades, after retail sales posted the biggest gain in four months in July.
High unemployment, stagnant wages, gridlock in Congress, and a stock market slump all contributed to a consumer mood that was as grim as when Jimmy Carter was President during the recession of 1980 and interest rates were more than 20 percent.
Despite the gloom U.S. consumers kept spending in recent weeks with retail sales up in July by the most in four months.
“People’s spending doesn’t always correspond with their mood,” said Stephen Stanley, chief economist at Pierpont Securities in Stamford, Connecticut. “I doubt things are as weak as the sentiment readings suggest, but no doubt people will be cautious in August.”
After one of the most volatile weeks in memory, U.S. stocks ended higher on Friday as the encouraging retail sales data overshadowed the weak consumer sentiment data.
But “the tumultuous last 10 days or so hasn’t given our core customer, the middle income family, any reason to be more confident,” said J.C. Penney Co Inc Chief Executive Myron Ullman on an analysts conference call Friday morning after the chain store retailer forecast weaker-than-expected third-quarter earnings.
GLOOM ABOUT GOVERNMENT
The preliminary August reading on the consumer sentiment index fell to 54.9 in early August, down from 63.7 in July, and the index has fallen for three straight months in the Thomson Reuters/University of Michigan survey.
Unemployment at 9.1 percent of the workforce, low wage rises, and the protracted debate in Congress over raising the U.S. government debt ceiling spooked consumers, survey director Richard Curtin said in a statement.
“Never before in the history of the surveys have so many consumers spontaneously mentioned negative aspects of the government’s role,” Curtin said.
“This was more than the simple recognition that traditional monetary and fiscal policy measures were largely spent. It was the realization that the government was unable or unwilling to act,” Curtin added.
Bad economic times were expected by 75 percent of all consumers in early August, just below the all-time peak of 82 percent in 1980. Buying plans for household durables and vehicles declined in early August, falling back to their recession level lows.
“There is no doubt that the American families are having difficulty, wanting to invest in big-ticket home items during this economic situation,” J.C. Penney’s CEO Myron Ullman said.
Furniture sales in the second quarter were down 20 percent from a year earlier, Ullman added.
The current gloomy consumer sentiment suggests restaurant sales will slip as autumn approaches also, according to the Kurt Salmon’s Restaurant Spending Trajectory report.
“Economic uncertainty and protracted unemployment continue to impact consumers’ spending decisions across all categories,” said Todd Hooper, a Kurt Salmon restaurant industry analyst.
U.S. RETAIL SALES JUMP IN JULY
Despite the decline in consumer confidence in recent months, U.S. retail sales in July posted the biggest gain since March, tempering fears the world’s largest economy might be slipping back into recession.
The 0.5 percent increase in retail sales reported by the U.S. Commerce Department was in line with analyst forecasts and followed an upwardly revised 0.3 percent gain in June.
Consumer spending accounts for two thirds of U.S. economic activity, and the data indicates the third quarter was off to a decent start.
Excluding autos, sales increased 0.5 percent, well above forecasts for a 0.2 percent gain. The figures were bolstered by a 1.6 percent jump in gasoline station sales, in part reflecting the higher cost of fuel. Retail sales excluding autos, gasoline and building materials rose 0.4 percent.
“When you look at the overall data that’s been coming out, it’s really a mixed bag, and this shows that the economy is not falling off its wheels,” said Rudy Narvas, senior economist at Societe Generale in New York.
After one of the most volatile weeks in memory, U.S. stocks ended higher on Friday in a tentative sign that the worst of the selling may be over.
The Dow Jones industrial average gained 125.71 points, or 1.13 percent, to 11,269.02. The Standard & Poor’s 500 Index added 6.17 points, or 0.53 percent, to 1,178.81.
U.S. economic growth was anemic in the first half of the year and unemployment remained elevated, raising worries that the recovery might again falter and triggering speculation that the Federal Reserve might need to resort to additional monetary easing [ID:nN1E77B0I4].
The global financial market volatility of the past week and the state of the U.S. economy was on the agenda when President Barack Obama met on Friday with U.S. business leaders, including chief executives from Johnson & Johnson, Wells Fargo & Co, US Bancorp, Xerox Corp, BlackRock Inc and Silver Bridge.
Obama’s hopes for re-election in 2012 will likely hinge on his success in lowering unemployment from its current 9.1 percent, boosting sluggish economic growth, and restoring confidence lost from the fractious debt debate in Congress and Standard & Poor’s downgrade of the government’s credit rating on August 5.
(Editing by Neil Stempleman and Clive McKeef)
Source: Reuters US Online Report Business News