RTTNews - Consumer sentiment in the month of July has deteriorated by much more than anticipated, according to a report released by Reuters and the University of Michigan on Friday, with the decrease likely due in part to concerns about the labor market.
The report showed that the preliminary reading on the consumer sentiment index for July came in at 64.6 compared the final reading of 70.8 for June. Economists had been expecting a more modest decrease to a reading of about 70.0.
Commenting on the data, the Reuters/University of Michigan Surveys of Consumers said, Consumers concluded that the economic downturn would last longer and their personal finances would not recover as quickly as they had previously expected.
A considerable deterioration in expectations contributed to the steep drop by the index, with the expectations index falling to 60.9 in July from 69.2 in June.
Consumers also had a weaker assessment of current conditions, as the current conditions index fell to 70.4 in July from 73.2 in the previous month.
Chris Low, chief economist at FTN Financial, said, The drop in current conditions can be explained by disappointment over the unexpectedly big decline in June payrolls and the unemployment rate's rise to 9.5%, both of which received plenty of media attention.
But expectations were down more than current conditions, suggesting the other big news story of the second half of May - the cap and trade and healthcare reform bills - may have been an even bigger factor in the confidence drop, Low added.
In recent weeks, Republicans have routinely criticized the possible tax increases associated with the cap and trade and healthcare reform efforts.
At a news conference earlier this week, House Republican Leader John Boehner, R-OH, said Democrats should scrap job-killing legislation like Speaker Pelosi's national energy tax and their government takeover of health care if they want to protect and create jobs.
Republicans have also released several statements and videos questioning the effectiveness of Obama's stimulus plan and have called for the implementation of a GOP plan more focused on helping small businesses.
While Jack Ablin, chief investment officer at Harris Private Bank, told RTTNews that the drop in consumer sentiment isn't an indication that the stimulus plan isn't working, he noted that the stimulus has to start to leach into the natural economy in order to be really effective.
Priming the pump is one thing, but the pump then needs to move on its own, Ablin said, It remains to be seen if all of this stimulus is actually expanding into the natural economy.
With regard to inflation, the Reuters/University of Michigan report showed that one-year inflation expectations edged down a tenth of a percentage point to 3%, while five-year expectations edged up a tenth of a percentage point to 3.1%.
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