Consumer confidence in the U.S. unexpectedly dropped in August from a six-year high as Americans faced rising interest rates.
The Thomson Reuters/University of Michigan preliminary index of consumer sentiment fell to 80 from 85.1 in July, which was the highest since July 2007. The median projection of 68 economists surveyed by Bloomberg called for little change at 85.2. The decline this month was the biggest since December.
Higher mortgage rates are threatening to crimp momentum in the housing market that’s contributed to the economic expansion. At the same time, job growth and increased personal wealth tied to stock portfolios and home values are helping offset the effects of higher payroll taxes and federal government budget cuts that began early this year.
“Interest rates are going up a little bit, that never helps,” Paul Ashworth, chief U.S. economist at Capital Economics in Toronto, said before the report. “But we still have the background of what looks like a still-improving housing market.”
Stocks were little changed after the report. The Standard & Poor’s 500 Index declined 0.1 percent to 1,659.24 at 10:23 a.m. in New York.
Estimates (CONSSENT) in the Bloomberg survey of economists ranged from 82 to 87. The index averaged 89 in the five years leading up to the last recession that began in December 2007 and 64.2 during the 18-month slump that ended in June 2009.
The early August setback in the Michigan index was larger than projected by the weekly Bloomberg Consumer Comfort Index, which slipped from its highest level in more than five years. The comfort gauge fell to minus 26.6 for the period ended Aug. 11, its first drop in a month. The reading was the second-strongest since January 2008, behind the prior week’s minus 23.5.
The Michigan survey’s current conditions index, which takes stock of Americans’ view of their personal finances, dropped to 91 from a six-year high of 98.6 in July. The 7.6 point decline was the biggest in three years.
The group’s index of expectations six months from now decreased to 72.9 in August from 76.5 last month.
Americans expect an inflation rate of 3.1 percent over the next year, the same as in July. Over the next five years, Americans expect a 2.8 percent rate of inflation, also unchanged from last month.
Consumers continue to cope with elevated unemployment and higher taxes, which is hurting sales of non-discretionary merchandise. Wal-Mart Stores Inc. (WMT), the world’s largest retailer, cut its annual profit forecast this week after shoppers’ reluctance to buy more than the bare necessities hurt second-quarter sales.
“The U.S. retail environment remains challenging, with virtually no inflation in food and the higher payroll tax,” Chief Financial Officer Charles Holley said on an Aug. 15 earnings call. “Our expectations for the back half of the year are through a lens of cautious consumer spending.”
Some retailers are reporting higher foot traffic as the effects of this year’s higher taxes begin to wear off and consumer spending picks up. At Tumi Holdings Inc. (TUMI), a high-end luggage maker based in South Plainfield, New Jersey, sales were up 13 percent in the second quarter from the same period a year ago. Mobile phone covers and leather accessories are selling fast, Chief Executive Officer Jerome Griffith said.
“I feel pretty good about the back part of the year,” Griffith said on an Aug. 7 earnings call. “At the end of the day, part of it’s going to depend on consumer sentiment and people walking in through the doors. If it continues the way that we see it right now, it’s going to be a pretty good back half of the year.”
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