Confidence among U.S. consumers dropped more than forecast in March as fuel costs surged to the highest level in more than two years.
The Conference Board’s confidence index fell to a three-month low of 63.4 from a revised 72 reading in February, figures from the New York-based private research group showed today. Another report showed home prices decreased in January for a seventh consecutive month.
Rising commodity prices and falling home equity are undermining Americans’ sentiment. A pickup in the job market and savings from tax cuts make it less likely that consumer spending, which accounts for about 70 percent of the economy, will falter.
“Higher prices at the gas pump and at the grocery store have rattled consumers,” said Tim Quinlan, an economist at Wells Fargo Securities LLC in Charlotte, North Carolina, who forecast a confidence reading of 63.5. At the same time, “the consumer isn’t going into hiding. We’re shifting into substantial job growth and we see the unemployment rate trending down.”
Shares climbed after Home Depot Inc. said it sold $2 billion in bonds to raise cash and finance buybacks. The Standard & Poor’s 500 Index rose 0.7 percent to 1,319.44 at the 4 p.m. close in New York. Treasury securities fell, sending the yield on the benchmark 10-year note up to 3.49 percent from 3.43 percent late yesterday.
Worse than Forecast
The median forecast of 69 economists surveyed by Bloomberg News called for the confidence index to drop to 65 this month. Estimates ranged from 59 to 73.5. The measure averaged 98 during the expansion that ended in December 2007.
Another report today showed home prices fell in January by the most in a year, raising the risk that home sales will keep slowing. The S&P/Case-Shiller index of property values in 20 cities dropped 3.1 percent from January 2010, the biggest year-over-year decrease since December 2009.
Home prices fell 0.2 percent in January from the prior month after adjusting for seasonal variations, following a 0.4 percent December decrease.
Rising foreclosures are swelling the number of houses on the market, which may put additional pressure on prices in coming months. At the same time, a further decline in home values may keep potential buyers on the sidelines as they foresee better deals, hurting construction and consumer spending as owners’ equity evaporates.
“Prices will continue to move downward probably for the rest of the year,” said David Semmens, a U.S. economist at Standard Chartered Bank in New York, who correctly forecast the drop. “They won’t turn around until you have consumers feel that housing is genuinely cheap and until they feel a lot more secure in their labor-market position.”
The Conference Board’s gauge of consumer expectations for the next six months dropped as fewer Americans said they plan to purchase cars, homes and appliances in the next six months.
The share of respondents expecting more jobs to become available in the next six months declined, as did the percentage of those anticipating an increase in incomes.
The group’s measure of present conditions increased to 36.9, the highest since November 2008, from 33.8 a month earlier. The gauge rose as 15.1 percent viewed current business conditions as being “good,” up from 12.4 percent a month earlier.
The share of consumers who said jobs are currently plentiful fell to 4.4 percent from 4.9 percent. Those who said jobs are hard to get was little changed at 44.6 percent from the prior month.
The households surveyed in March projected an inflation rate of 6.7 percent over the next 12 months, the highest level since October 2008.
“Consumers’ inflation expectations rose significantly in March and their income expectations soured, a combination that will likely impact spending decisions,” Lynn Franco, director of the Conference Board’s consumer research center, said in a statement.
Michaels Stores Inc., an arts-and-crafts retailer based in Irving, Texas, is among companies monitoring how consumers may respond to the higher costs for fuel and food.
“We think that the customer will be under pressure because of gasoline prices, food prices,” John Menzer, chief executive officer, said on a conference call with investors on March 24. “We have to really look at value, value throughout our store.”
Today’s report is consistent with other confidence data. The Bloomberg Consumer Comfort Index dropped in the week ended March 20 to the lowest level since August. The final reading of the Thomson Reuters/University of Michigan confidence index fell in March to the lowest level since November 2009.
The economy has added jobs for five consecutive months through February, when the unemployment rate fell to the lowest level since April 2009. A report due on April 1 may show March payrolls grew by 190,000, and the jobless rate held at 8.9 percent, according to the Bloomberg survey median.
Increasing prices remain a headwind. Regular fuel rose to $3.59 a gallon on March 28, the most since October 2008, according to AAA, the nation’s biggest motoring organization. Food costs climbed 0.6 percent last month, the most since 2008, consumer-price index data showed on March 17.
Another concern is housing. Eighteen of the 20 cities in the S&P/Case-Shiller index showed a year-over-year price decline, led by a 9.1 percent drop in Phoenix. In January, prices in 11 markets dropped to fresh lows since their 2006, 2007 peaks, the same as in December.