Summer swoon: Consumer confidence drops for 2nd straight month

Consumer confidence may be taking the summer off, declining unexpectedly in July -- the indicator's second straight monthly decline -- primarily on citizens' concerns about the U.S. job market.

Consumer confidence declined to 46.6 in July from 49.3 in June, the Conference Board announced Tuesday. A Bloomberg News survey of economists had expected the index to total 50.0 in July. The index hit a record low of 25.3 in February.

Jobs market weighs on confidence

"Consumer confidence, which had rebounded strongly in late spring, has faded in the last two months," Lynn Franco, director of the Conference Board Consumer Research Center said. "The decline in the Present Situation Index was caused primarily by a worsening job market, as the percent of consumers claiming jobs are hard to get rose sharply."

Further, consumers continued to rate current conditions unfavorably in July. Those claiming business conditions are 'bad' increased to 46.3 percent in July from 45.3 percent in June, while those claiming business conditions are 'good' increased slightly to 9.1 percent from 8.1 percent.

As noted, consumers' assessment of the job market was decidedly downbeat in July. Those saying jobs are 'hard to get' surged to 48.1 percent in July from 44.8 percent in June, while those claiming jobs are 'plentiful' dipped to 3.6 percent from 4.5 percent.

In addition, the board said consumers' short-term expectations remain at a very low level. Consumers expecting business conditions to improve over the next six months decreased to 18.9 percent in July from 20.4 percent in June, while those expecting conditions to worsen dipped to 18.9 percent from 20.4 percent.

Investors should pay attention to the Consumer Confidence Index because, historically, consumer spending has accounted for about 60-65 percent of U.S. GDP. Moreover, rises in consumer confidence are directly correlated with increases in consumer spending. Hence, if confidence rises, and a trend forms, that most likely means good things are ahead for corporate revenue and earnings.

The Consumer Confidence Index is based on a representative sample of 5,000 households.

Economic Analysis: A surprising decline in consumer confidence, as most economists had expected consumer confidence to hold its own in July, on the appearance of "green shoots" hinting at a U.S. economic recovery, a rise in stock prices, and some hope for a bottom to the horrible housing slump. But, as is so often the case with consumer confidence, the job market issue dominated. Americans remain concerned about the amount of job losses -- more than 6.5 million since the recession started in December 2007 -- their own job security, and the prospects for job growth. Right now, assuming a modest recovery in Q3/Q4, the prospects for robust job growth are not strong, and citizens, making the connection between job growth and the health of the U.S. economy, are expressing this uneasiness in polls, even amid modest signs of improving commercial conditions. By extension, investors should not expect sustained, large increases in consumer confidence until the era of large, monthly lay-offs has ended.
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