Shaky Consumer Sentiment a Hurdle to Growth Pickup: Economy

Employees Fill a Tank Car with Oil in Colorado
Elevated fuel prices and limited wage gains are weighing on Americans’ moods and squeezing their pocketbooks. Photographer: Matthew Staver/Bloomberg

One closely-watched measure of consumer confidence unexpectedly fell in June to a three-month low, highlighting a split in attitudes that is holding back the U.S. economy.

The Thomson Reuters/University of Michigan preliminary sentiment index decreased to 81.2 from 81.9 in May. The median estimate of economists surveyed by Bloomberg had projected an increase after competing gauges strengthened in recent weeks.

“Confidence and sentiment indicators have been bouncing around,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York, and the best consumer-spending forecaster over the past two years, according to data compiled by Bloomberg. “Things are gradually getting better, but we still have plenty of problems.”

Elevated fuel prices amid turmoil in Iraq and limited wage gains are weighing on Americans’ moods and squeezing buying power even as the job market improves. Figures yesterday showed retail sales cooled in May following an impressive three-month run, tempering the outlook for household spending, which accounts for about 70 percent of the economy.

“We’re really just creeping along here,” Shapiro said. “Consumer spending growth will be moderate.”

Stocks climbed, with the Standard & Poor’s 500 Index paring a weekly decline, as a rally in Intel Corp. and corporate deals overshadowed concern that violence in Iraq will disrupt oil supplies. The S&P 500 advanced 0.3 percent to 1,936.16 at the close in New York.

Prices Drop

Another report today showed U.S. wholesale prices unexpectedly fell in May, suggesting demand isn’t robust enough to spur inflation. The producer price index decreased 0.2 percent, the first drop in three months, after jumping 0.6 percent in April, according to Labor Department data. Over the past 12 months, costs climbed 2 percent.

“Producer price inflation is still fairly contained despite the big increases in the last few months,” Omair Sharif, a U.S. economist at RBS Securities Inc. in Stamford, Connecticut, said in a research note.

The median forecast in the Bloomberg survey of 67 economists projected the sentiment index would rise to 83, with estimates ranging from 80 to 84.5. It averaged 89 in the five years before December 2007, when the last recession began, and 64.2 during the 18-month contraction.

Today’s sentiment figures are at odds with some other measures. The Bloomberg Consumer Comfort Index climbed to a five-week high of 35.5 in the period ended June 8, figures showed yesterday. The measure of the state of the economy rose to a six-week high, and the gauges of personal finances and whether this is a good time to make purchases also advanced.

Expectations Tarnished

Michigan’s measure of expectations six months from now decreased to 72.2 from 73.7 the prior month. The current conditions index, which takes stock of Americans’ view of their personal finances, rose to 95.4 this month from 94.5 in May.

The job market continues to make progress, with payrolls in May exceeding the pre-recession peak for the first time, according to Labor Department data released last week. Employment grew by 217,000 after increasing by 282,000 in April. It marked the fourth consecutive month of gains of more than 200,000, the first time that’s happened since early 2000. The jobless rate held at an almost six-year low of 6.3 percent.

One bright spot for spending is motor vehicle demand. Cars and light trucks sold at a 16.7 million annualized rate in May, the strongest since February 2007, according to Ward’s Automotive Group.

Housing Rebound

Restoration Hardware Holdings Inc., a seller of furniture, linens and home furnishings, is among retailers benefiting from the housing recovery. The Corte Madera, California-based company boosted estimates for annual sales and per-share earnings after first-quarter revenue jumped 22 percent from a year earlier.

“The business momentum and strong trends we are seeing thus far in 2014 give us further confidence in our financial outlook for the year,” Gary Friedman, chairman and chief executive officer, said in a statement on June 11.

At the same time, some indicators of the labor market are improving only gradually. Wage growth is sluggish, and the number of people unemployed for 27 weeks or longer as a share of the total jobless is still above its pre-recession level.

More expensive fuel is a restraint on household budgets. The cost of regular-grade gasoline, at $3.65 a gallon this week, is hovering close to the 2014 high of $3.70 reached in April.

Growth Forecasts

The median forecast of economists surveyed by Bloomberg this month projects the world’s largest economy will expand at a 3.5 percent annualized rate this quarter after shrinking at a 1 percent pace in the first three months of the year.

Tracking estimates in recent days that take into account the latest data revisions have indicated the first-quarter slump was even larger, approaching 2 percent. The government will issue its update of first-quarter gross domestic product data on June 25.

Some businesses catering to bargain shoppers have yet to see an improvement in demand. Wal-Mart Stores Inc., the world’s largest retailer, last month forecast second-quarter profit that missed analysts’ estimates as it copes with slow sales in the U.S., especially at its Sam’s Club warehouse stores.

More recently, Wal-Mart U.S. Chief Executive Officer William Simon said on a June 6 call that customers in the income segments served by the discount retailer remain “challenged.”

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