Consumer Confidence Hits Five-Month Low Over Unemployment Concerns

Consumer Confidence Falls to Five-Month Low
Consumer Confidence Falls to Five-Month Low

In yet another sign that the U.S. economic recovery may have lost some of its strength this summer, the Consumer Confidence Index fell to 50.4 in July -- a five-month low -- the Conference Board announced Tuesday.

The consensus of economists surveyed by Bloomberg had been that the closely watched index would dip to 51 in July from a revised 54.3 in June, and 63.3 in May. The index hit a record low of 25.3 in April 2009.

As they did in June, every index component dropped in July, and it was clear what was weighing on the minds of consumers: job market conditions and the outlook for business conditions in the near future.

The percentage of survey respondents who said jobs are "hard to get" increased to 45.8% in July from 43.5% in June, while those claiming jobs are "plentiful" was unchanged at 4.3%.

The percentage of those expecting there to be fewer jobs increased to 21.8% from 20.1%. Those expecting more jobs to become available in the months ahead declined to 14.3% from 16.2%.

In addition, those expecting an improvement in business conditions over the next six months decreased to 15.9% from 17.1%, while those expecting business conditions to worsen increased to 15.7% from 13.9%.

Confidence Decline Seen Weighing On Fall Sales

Lynn Franco, director of The Conference Board's Consumer Research Center, said the drop in consumer confidence will likely weigh on back-to-school sales.

"Consumer confidence faded further in July as consumers continue to grow increasingly more pessimistic about the short-term outlook. Concerns about business conditions and the labor market are casting a dark cloud over consumers that is not likely to lift until the job market improves," Franco said in a statement. "Given consumers' heightened level of anxiety, along with their pessimistic income outlook and lackluster job growth, retailers are very likely to face a challenging back-to-school season."

Americans' evaluation of current conditions in July was mixed, however. Those claiming business conditions are "bad" increased to 43.6% from 41.0% in June. Meanwhile, those claiming business conditions are "good" increased slightly, to 9% from 8.4%.

Historically, rises in consumer confidence are directly correlated with increases in consumer spending, which has accounted for about 65% to 70% of U.S. GDP. Hence, if confidence rises, and a trend forms, that most likely means good things are ahead for corporate revenue and earnings; falling confidence, of course, indicates the opposite.

Another Point for the Bears

July's consumer confidence dip provides another point in favor of those who see the economy heading in a bear market direction.

The bears argue that inadequate job growth, sluggish home sales, and the nearly half-year downtrend in consumer confidence are tell-tale signs of an economic slowdown -- something that would weigh on the stock market.

Conversely, the bulls argue that generally better-than-expected quarterly earnings reports that have come out so far this season, rising business investment and U.S. exports, low inflation, and cash-flush corporations and banks are setting the stage for an increase in U.S. GDP growth in the fall.