Consumer Sentiment Plunges as Gas Prices Surge

In a decidedly downbeat week for the markets, the U.S. trade deficit and jobless claims rose, and the consumer sentiment index plunged 9.3 points to a far worse than expected 68.2 in March (preliminary), as surging gas prices weighed on Americans' mood.

The consensus of economists surveyed by Bloomberg had been that the preliminary March consumer sentiment reading would dip to 76.5 from 77.5 in February, after rising from 74.2 in January, 74.5 in December, 71.6 in November, and 67.7 in October. in December 2007, at the start of the Great Recession, the index stood at 88.9, and it hit a recent low of 55.3 in November 2008, during the acute stage of the financial crisis.

The consumer sentiment report closed out a disappointing week for the economy. Consumer credit did rise $5 billion in January, but the U.S. trade deficit surged by $6 billion to $46.3 billion in January, pushed up by a higher imported oil bill. Meanwhile, initial jobless claims rose a worse than expected 26,000 to 397,000.

Labor Market, Inflation Trends

Mike Englund, chief economist for Action Economics in Boulder, Colo., said even though jobless claims rose this week, he sees good things for job seekers in the longer-term downward trend in claims that pushed the metric below the psychologically significant 400,000 level this winter.

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"We're just giving back the distortions from the holiday in the prior week," Englund told Bloomberg News. "It does appear that tightening in the labor market gained a little steam."

Returning to the consumer sentiment report, the current economic conditions component declined to 83.6 in March from 86.9 in February. In addition, the consumer expectations component plunged to 58.3 from 71.6 in February -- its lowest level since March 2009.

Consumers' outlook on inflation grew more pessimistic in March. The 1-year inflation outlook jumped to 4.6% from 3.4% in February; the 5-year inflation outlook rose to 3.2% from 2.9%.

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 presages a drop in spending. And historically, consumer spending has accounted for 65% to 70% of U.S. GDP.

High Oil Prices Sour Sentiment

In general, consumers are feeling better about the economy than they were a year ago, largely due to signs that the major period of layoffs appears to be over, and also due to reports of continued, better than expected corporate quarterly earnings.

However, as the March sentiment survey indicated, the sharp rise in gasoline prices to more than $3.52 per gallon for regular unleaded has put Americans in a more subdued mood as spring approaches. The reason is obvious enough: High gas prices reduce consumers' disposable income and also increase businesses' operating costs -- two key components of the U.S. economy.

However, while the oil and gas price spikes are large, investors shouldn't overact. If the price of oil, currently about $101 per barrel, moderates to $85 to $90, the negative impact on the U.S. economy will be modest, perhaps as small as a 0.1 or 0.2 percentage point decline in GDP for 2011.