July Jitters: Consumer Sentiment Plunges on Income, Job Fears

Talk about a disappointment: The consumer sentiment index unexpectedly plunged 9.5 points from 76 to 66.5 in July as Americans became increasingly concerned about the U.S. economic recovery's strength and lackluster job growth.

That decline in the index, based on the Reuters/University of Michigan Surveys of Consumers, brings the metric to its lowest level in 11 months.

A Bloomberg survey had expected July's (preliminary) consumer sentiment figure to dip to 75. The index was at 73.6 in May and at 72.2 in April.

Richard Curtin, director of the consumer sentiment surveys, said it isn't hard to identify the culprits in the index's swoon.

"Income and job prospects were extraordinarily weak and those bleak prospects have made consumers much more cautious spenders," Curtin said in a statement.

In the preliminary July survey, the consumer expectations component sank to 60.6 from 69.8 in June, while the 12-month economic outlook component plummeted to 65 from 79, Reuters reported Friday. Meanwhile, the one-year inflation expectations index rose to 2.9% from 2.8%.

Economists, business executives, and policy makers monitor consumer sentiment because, historically, consumer attitudes have been correlated with consumer decisions to spend. In general, rising consumer sentiment leads to increases in consumer spending, or the maintenance of a level of spending, while falling consumer sentiment tends to predict the reverse. And historically, consumer spending has accounted for 65% to 70% of U.S. GDP.

More Ammunition For the Bearish Argument

July's consumer sentiment swoon is likely to complicate the ongoing tug-of-war between the economic bulls and bears.

The bullish argument is that the U.S. economic recovery remains intact, propelled by rising exports, a rebound in manufacturing, low inflation, and, most recently, good earnings reports from such economic bellwethers as Intel (INTC) and General Electric (GE).

But the new consumer sentiment numbers support a more bearish view: That a slowdown in the European economy (stemming from the austerity moves being made to combat the continent's government debt crises) will combine with sub-par U.S. job growth and reduced U.S. consumer spending to slow the economy in the second half of 2010, possibly tipping the economy into a double-dip recession.

This survey shows a clear trend in the consumer viewpoint: Americans may know the economy is growing, but they remain very concerned about the nation's ability to create jobs, and about their abilities to improve their personal financial situations.