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Those Gloomy Consumers

The University of Michigan consumer sentiment index tumbled to 78.7 in the preliminary August reading, vs. 84.7 in the final July print. That's the lowest since last October in the aftermath of the hurricanes. The current economic conditions index fell to 100.8 from 103.5 in July. The economic outlook index dropped to 64.5 from 72.5. The 1-year inflation index jumped to 4.2%, from 3.2% in July.

The report revealed a bigger drop than expected. The decline was similar to the big drop in the weekly ABC/Washington Post index to -15 in the second week of August, from -12 in the first week, and a -10 average in July.

The drop was bigger, however, than the more restrained August declines in the IBD/TIPP index to 45.6 from 47.3, and in the RBC-IPSOS cash index to 74.8 from 80.1. These earlier surveys probably reflected less of the bad "headline" news of recent days and weeks.

The August declines must be seen as reflecting the escalating Middle East conflict, the London terrorist arrests, rising gasoline prices, the housing market correction, and fears of inflation and ensuing Fed tightening, which would affect the economy. As of now, there is no evidence that this down-leg, like the repeated similar drops earlier in this war-torn and oil price-weary expansion, are actually hitting spending.

DOWN-SPIKES. Still, our Conference Board consumer confidence forecast for August has been knocked down sharply, to 102, vs. 106.5 in July. As with these prior reactions to bad headline news, the expectations index fell by substantially more than the current conditions index.

Indeed, as we have consistently seen since early 2004, the current conditions figures remain at acceptable levels despite these periodic down-spikes, though further deterioration in the current conditions series would be troublesome.

Looking at the quarterly consumption outlook, the sharp drop in confidence in the fourth quarter, and subsequent rebound in the first quarter, lined up with the gasoline price-related swing in "real" consumption, though the savings rate trended downward steadily through the period with little apparent consumer "pull back," and strength in nominal spending persisted.

Similarly, the weakness in sentiment in the second quarter coincided with another impact on "real" spending from rising energy prices, but the savings rate continued to trend lower in that quarter as well, and nominal spending remained strong. Headline-news effects in the third quarter are having a negative impact again, though nominal spending, at least through July, has remained solid.

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