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The U.S. Consumer: Darkness in June

The plunge in the consumer confidence index shows deepening worries about inflation, with the report's future expectations index hitting an all-time low

Talk about the summertime blues: The U.S. consumer's mood appears to have shifted from wariness to unbridled pessimism in June. That's the takeaway from the Conference Board's U.S. consumer confidence report for the month issued June 24, which provided a few more fresh records to document the historic degree of public pessimism over growth and inflation prospects.

Indeed, the public dialogue on the economy may now be worse than at any time since the disastrous 1970s and early-1980s periods, which is remarkable given the ongoing resilience in reported economic data. As for the Federal Reserve's June 25 policy statement, the weak confidence report is likely to cool the central bank's interest in appearing too hawkish on inflation.

The drop in the U.S. consumer confidence index to 50.4 in June, from a revised 58.1 in May, leaves the index just barely above prior cycle-lows of 47.3 in February, 1992, and 50.1 in May, 1980. The drop in the already weak future expectations reading to 41.0 in June, from 45.7 in May, left the figure well below the prior all-time low of 45.2 in December, 1973, when the public was shaken by war in the Middle East and the first OPEC oil embargo.

Resilient Spending as Confidence Plummets

The one-year-ahead inflation reading was steady at 7.7% in June, after soaring in May from the 6.8% April reading that matched the prior all-time high set in September, 2005.

The big decline in the headline number can be at least partly explained by the concentration of bad news in the form of soaring prices, which produce both high-profile anger by consumers and a boost to U.S. nominal spending, as well as an upward jolt to growth for the "commodities-based" industries of the U.S. economy that account for a nontrivial portion of aggregate output.

All the main U.S. consumer confidence measures are now showing massive declines since August despite the still-surprising resilience of consumer spending relative to after-tax income, as soaring prices are boosting nominal spending while fueling public angst. The public has plenty of reasons for pessimism, but our assumption is that it is the explosive surge in prices that explains the sizable discrepancy between confidence readings and the monthly spending figures, as made so glaringly clear with the last round of big retail sales gains right alongside the array of new record lows being set by the various confidence measures.

Pessimism's Economic Focus

More generally, the dramatic declines in the various confidence measures are capturing what may be the most pessimistic public dialogue on the economy since the 1970s and early 1980s. During the 2001 recession the public, and most economists, had mixed views on the degree of slowing in the economy, and the confidence drop later that year reflected pessimism associated with the September 11 terrorist attacks rather than the economy in specific. Similarly, in the 1990 recession, public pessimism reflected concerns about the impending Gulf War in the aftermath of Iraq's invasion of Kuwait.

Current pessimism, in contrast, is focused squarely on economic and inflation developments, as was the case through the "stagflation" years of the 1970s and the difficult 1980-1982 period.

Offsetting this bad news, however, was some good news from the S&P/Case-Shiller data on U.S. home prices released June 24, which posted a smaller-than-expected price decline in April of 1.4% to take some of the downside edge off outsize 2.1%-2.6% monthly drops since November. The year-over-year decline in April was 15.3% for the 20-city index.

Though the housing outlook is still bleak, this moderation in the pace of price declines adds to evidence from other housing sector reports that the downdraft from the beleaguered real estate sector may be diminishing.

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