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Plunge in Consumer Confidence Exposes Risk for U.S. Economy

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Americans are growing concerned that this is about as good as it gets.

Consumer confidence slumped in July by the most in almost four years as households became less upbeat about the outlook for the economy, employment and their finances, figures from the New York-based Conference Board showed Tuesday.

Swings in stock prices stemming from the Greek financial crisis and weakness in China took a toll, according to the group, showing why Federal Reserve policy makers may want to consider international events in determining when to raise interest rates. Outsize moves in confidence have been common this year, underscoring erratic consumer temperament that poses a risk to already uneven household spending.

“It’s a bit of a surprise and may prove a little erratic,” said David Sloan, senior economist at 4Cast Inc. in New York. “If the stock market weakness recently extends further, a turnaround might be harder. But energy prices have slipped and that could give some support to consumers.”

The Conference Board’s index retreated to 90.9 this month from a revised 99.8 in June. The July reading, the weakest in 10 months, was lower than the most pessimistic forecast in a Bloomberg survey of economists.

The 8.9 point drop also marked the biggest negative surprise since February 2003. The median forecast was 100, with estimates ranging from 97 to 103 after a previously reported 101.4 in June. The gauge has moved at least five points in five of the first seven months of the year.

Consumer Expectations

The Conference Board’s gauge of consumer expectations for the next six months slumped to the lowest since February 2014. There was a smaller decline in the group’s measure of present conditions.

“A less optimistic outlook for the labor market, and perhaps the uncertainty and volatility in financial markets prompted by the situation in Greece and China, appears to have shaken consumers’ confidence,” Lynn Franco, director of economic indicators at the Conference Board, said in a statement.

Americans’ assessments of current and future labor-market conditions deteriorated. The proportion expecting more jobs to become available in the next six months decreased to the lowest level since November 2013.

Income Expectations

Stock-market volatility probably weighed on income expectations. The share of respondents who anticipated a decrease in their incomes six months from now rose to the highest since October.

Earlier this month, the Standard & Poor’s 500 Index fell to the lowest level since March on concerns about Greece’s possible financial collapse and a slowdown in China’s economy. A drop in U.S. sentiment this month that results in weaker retail spending would represent a challenge to the Fed. U.S. central bankers began a two-day meeting Tuesday and while they are widely expected to hold borrowing costs steady, Fed watchers are looking to Wednesday’s policy statement for clues on when they will increase rates for the first time since 2006.

“One disappointing report on consumer confidence will not be sufficient to lead policy makers to swerve as they head toward a second-half liftoff, but it will breed some doubts as to whether the economy is sufficiently robust to endure a rate hike in September,” Bloomberg Intelligence economists Carl Riccadonna and Josh Wright said in a research note.

Purchase Plans

Even with this month’s downshift in attitudes, purchase plans were generally positive in July, according to the Conference Board. Intentions to buy homes and appliances increased.

Another report Tuesday showed home prices in 20 U.S. cities increased at a slower pace. The S&P/Case-Shiller index of property values climbed 4.9% in the 12 months ended in May after a 5% year-over-year gain a month earlier.

Higher living costs and scant signs of a bigger pickup in wage growth are weighing on confidence. The cost of living rose in June for a fifth month, paced by increases in rents. The consumer-price index climbed 0.3% after a 0.4% May gain, Labor Department figures show. Costs over the past 12 months advanced for the first time this year.

Average hourly earnings increased just 2% over the 12 months ended in June, in line with the average since the current expansion started in 2009.

–With assistance from Jordan Yadoo in New York.

— Check out Koesterich, Doll Watch Corporate Revenues After Tough Week for Stocks on ThinkAdvisor.


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