Consumer Confidence Hits Five-Month Low Over Unemployment Concerns

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.