Confidence among U.S. consumers unexpectedly dropped to a one-year low in September, indicating the biggest part of the economy is being handcuffed by a struggling labor market.
The Thomson Reuters/University of Michigan preliminary index of consumer sentiment fell to 66.6 from 68.9 in August, the group said today. This month’s reading was less than the most pessimistic forecast in a Bloomberg News survey.
Flagging optimism with unemployment close to a 26-year high may increase the risk consumers will cut back on their purchases, which account for 70 percent of the economy. Staff reductions at companies such as FedEx Corp. indicate it will take years to recover the 8.4 million jobs lost in the recession.
“Already cautious consumers are even more cautious,” said Jim O’Sullivan, global chief economist at MF Global Ltd. in New York. “Consumer spending has certainly been a weak part of the recovery and there is no sign in these numbers of any sudden change in that.”
To attract shoppers, companies such as Wal-Mart Stores Inc. and Kroger Co. are discounting merchandise. The U.S. cost of living, minus food and energy prices, was unchanged in August, the Labor Department said today. The overall consumer price index rose 0.3 percent, reflecting in part more expensive gasoline.
A limited risk of inflation and a slowing economy help explain why economists project the Federal Reserve will hold interest rates close to zero until late next year.
“These numbers won’t be a surprise to Fed policy makers,” said Yelena Shulyatyeva, a U.S. economist at BNP Paribas in New York, who accurately forecast the consumer price figures. “They need to worry about unemployment and boosting growth and not worry about inflation.”
Stocks rose, with the Standard & Poor’s 500 Index completing the longest weekly rally since April, as better-than- estimated earnings at technology companies overshadowed the drop in confidence. The S&P 500 gained 0.1 percent to 1,125.59 at the 4 p.m. close in New York. The yield on the 10-year Treasury note fell to 2.74 percent from 2.76 percent late yesterday.
Economists forecast the confidence measure would rise to 70, according to the Bloomberg survey median of 65 economists whose estimates ranged from 68 to 73. The index, which declined this month to the lowest level since August 2009, averaged 89 in the five years leading up to the recession that began in December 2007.
The University of Michigan gauge of consumer expectations for six months from now, which more closely projects the direction of consumer spending, decreased to 59.1, the lowest since March 2009.
About 67 percent of Americans in the Michigan survey said they anticipate “bad financial conditions” in the coming year, according to the report.
All of the decrease in the consumer sentiment index was recorded among households with incomes above $75,000. The decline in that group reflected a decrease in sentiment about personal finance, buying plans and prospects for the U.S. economy. Confidence rose among lower-income households.
The disparity centers around the debate on Capitol Hill over whether to extend the Bush-era tax cuts. A prolonged delay in extending the reductions would be detrimental to the economic recovery, the report said.
President Barack Obama’s approval ratings have slipped as economic growth slowed this year and employment stagnated. Fifty-six percent of voters said they disapproved of his handling of the economy, according to a poll by Quinnipiac University taken Aug. 31 to Sept. 7.
The University of Michigan’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 such as cars, rose to 78.4 from 78.3 in the prior month.
As Americans remain cautious about spending, retailers such as Wal-Mart are feeling the pinch.
“Our customer remains challenged,” William Simon, president and chief operating officer of Wal-Mart’s U.S. operations, said at an analyst presentation Sept. 15. “We need to figure out how to operate in this environment.”
Second-quarter earnings were not what Wal-Mart “wanted” them to be, Simon said. The world’s largest retailer is experiencing a rising number of transactions being paid for with government-assistance programs and seeing some customers wait to buy baby formula until paychecks or assistance checks are issued, he said.
FedEx, the second-largest U.S. package-shipping company, yesterday said it will eliminate 1,700 jobs, less than 1 percent of its global workforce.
“We expect a phase of somewhat slower economic growth going forward,” Chief Executive Officer Fred Smith said on a conference call with analysts. “Slower growth is consistent with historical business cycles.”
The preliminary Thomson Reuters/University of Michigan consumer confidence report reflects about 300 responses, compared with 500 households for the final survey.