Consumer Sentiment Plunge Lowers Odds of U.S. Growth Rebound

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How the Price of Oil Impacts Consumer Spending

A souring economy has curdled the American consumer’s mood.

The University of Michigan’s preliminary sentiment index for May plunged to 88.6, the lowest since October, from 95.9 the prior month. It was weaker than even the lowest estimate of 68 economists surveyed by Bloomberg. Another report showed factory production stalled in April.

News that the world’s largest economy sputtered last quarter, combined with uneven employment gains, shook households this month, raising concerns that spending will be slow to pick up. A strong dollar and weak oil prices also are holding back manufacturing, further denting the likelihood of a quick rebound in the rate of expansion.

“It’s not very encouraging for growth prospects,” said Millan Mulraine, deputy head of U.S. research & strategy at TD Securities USA in New York, who projected a drop in confidence. “The spate of numbers has been quite weak.”

The Standard & Poor’s 500 Index closed at record for a second straight day as investors speculated the Federal Reserve would continue to support economic growth given the weak data. The S&P 500 rose 0.1 percent to 2,122.73 at the close in New York.

The 7.3 point decrease this month in the Michigan index was the largest since December 2012, when households were rattled by government negotiations to avert the “fiscal cliff” of tax increases and spending cuts set to take effect the following month. The gauge has shown bigger declines on only 20 other occasions since the monthly surveys began in 1978.

Survey Results

The median projection in the Bloomberg survey of economists called for an unchanged reading at 95.9. Estimates ranged from 91.4 to 97.5. The gauge averaged 88.8 for the five years leading to the last recession that started in December 2007. The average for 2014 was 84.1.

The sentiment survey’s current conditions index, which takes stock of Americans’ view of their personal finances, fell to 99.8 from the prior month’s 107. The measure of expectations six months from now decreased to 81.5 from 88.8.

“The decline was widespread among all age and income subgroups as well as across all regions of the country,” Richard Curtin, director of the Michigan Survey of Consumers, said in a statement.

Curtin said he was hopeful that the slump in confidence wouldn’t translate into diminished spending. One reason is that consumers, who previously thought the drop in gasoline prices would prove temporary, now believe fuel prices will climb only marginally.

Gasoline Prices

“They’re becoming more convinced that gas prices will remain relatively low for an extended period of time,” Curtin said in a conference call with Carl Riccadonna, chief U.S. economist at Bloomberg Intelligence in New York. Consumers “raised their precautionary savings on the expectation that gas prices would go back up, and now they are more confident they won’t. And so I think more of that money will flow into retail sales.”

Regular gasoline cost $2.69 a gallon at the pump on Thursday, according to AAA, the biggest U.S. motoring group. While the price has ticked up from a six-year low of $2.03 reached in late January, it is below the $3.64 consumers paid at this time last year.

Recent reports indicate consumers remain reluctant to open their wallets. Sales at retailers barely budged in April after a 0.2 percent drop from January through March that marked the first quarterly decline in almost three years.

Stores Sales

Store chain results reflected the weakness. Quarterly sales trailed analysts’ estimates at Kohl’s Corp. and J.C. Penney Co., the retailers reported this week.

“Consumers are still very cautious,” said Stuart Hoffman, chief economist at PNC Financial Services Group Inc. in Pittsburgh, Pennsylvania, who projected sentiment would drop. “We’re not seeing the spring rebound out of the winter doldrums.”

The economy grew at a 0.2 percent annualized rate from January through March after expanding at a 2.2 percent pace in the previous three months, according to figures from the Commerce Department. Household purchases, which account for almost 70 percent of the economy, advanced 1.9 percent compared with a 4.4 percent gain in the fourth quarter that was the largest in almost nine years.

Spending Outlook

Curtin said the current level of confidence usually corresponds with spending increases of about 3 percent.

Smaller gains in payrolls may also be restraining consumers’ enthusiasm. Employment has climbed by 194,000 on average in the first four months of the year compared with 260,000 in 2014.

Auto demand has remained a bright spot as cheap fuel costs boost sales for large and luxury sport-utility vehicles. Cars and light trucks sold at a 16.5 million annualized rate in April after 17 million the prior month, according to industry data from Ward’s Automotive Group. Purchases averaged 16.4 million in 2014.

That’s been helping to prevent manufacturing from retrenching even more. Soft export demand, caused by a stronger dollar and weaker global markets, continued to diminish U.S. manufacturing activity in April, while oil companies curtailed operations to cope with low fuel prices.

Production Stalls

Factory production was unchanged last month after a 0.3 percent gain in March, according to data from the Federal Reserve Friday. Excluding autos and parts, factory production declined 0.1 percent in April after climbing 0.1 percent a month before.

Total industrial production dropped for a fifth consecutive month as mining companies and utilities cut back.

“The manufacturing picture is really pretty flat,” said David Sloan, a senior economist at 4Cast Inc. in New York, who correctly projected the drop in overall production.

With some of the headwinds abating, including the recent rebound in oil prices and the resolution of a labor dispute that caused backlogs at ports on the West Coast, Sloan said manufacturing will probably improve a bit.

Factories “will go from flat to modest growth, but I wouldn’t count on strong growth,” he said.

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