August 9, 2022

Consumer Sentiment Slumped in Early July

Worries about stubbornly high unemployment pushed the Thomson Reuters/University of Michigan’s index of consumer sentiment to 63.8, the lowest level since March 2009, a report showed on Friday. Economists had expected the index to rise to 72.5, from 71.5 in June.

Separate data from the Federal Reserve showed that industrial production rose a modest 0.2 percent in June after two months of slight declines. Output was held back partly by supply disruptions in the auto industry related to the March 11 earthquake in Japan.

The reports were the latest in a series, including weak retail sales and employment, to suggest that an anticipated step-up in growth in the second half of the year might not be as strong as initially thought.

“We still expect an improvement in the second half, but the question is, How much can we grow?” said Yelena Shulyatyeva, an economist at BNP Paribas in New York. “Our view is the rebound is not going to be anything like in the prior cycles because we are growing at a lower potential rate right now.”

The Federal Reserve chairman, Ben S. Bernanke, said this week that the central bank was prepared to act if growth faltered further but made it clear that the Fed was not yet at that point.

The economy was hit by a combination of high commodity prices and bad weather, causing growth to slow sharply to a 1.9 percent annual rate in the first quarter after a brisk 3.1 percent in the final three months of 2010.

Disruptions to motor vehicle production and still-high gasoline prices are expected to have held growth to a rate of 1.5 to 2 percent in the second quarter. The government will release its initial second-quarter gross domestic product estimate on July 29.

Manufacturing in the second quarter posted its weakest rise since the recession ended in mid-2009. There are indications that manufacturing maintained its weak tone as the third quarter started.

The decline in consumer sentiment, which came even as gasoline prices dropped from a peak of more than $4 a gallon in May, does not bode well for consumer spending.

The debate in Washington over raising the country’s debt ceiling is adding to economic uncertainty.

Hard-pressed consumers could get a reprieve from declining commodity prices. Labor Department data showed that the Consumer Price Index fell 0.2 percent in June as gasoline prices tumbled 6.8 percent. Despite declines in the last two months, gas prices are up 35.6 percent over the previous 12 months.

The drop in consumer prices was the first in a year. Prices increased 0.2 percent in May.

Stripping out food and energy, however, the core index rose 0.3 percent after a similar gain in May. The rise in core inflation reflected a lagged pass-through from high commodity prices, and economists saw no threat of an upward spiral in price pressures.

In the 12 months to June, core inflation rose 1.6 percent after increasing 1.5 percent in May. This narrower measure of prices was pushed up by rises in housing, new vehicles, used trucks and apparel. Apparel prices recorded their biggest jump since March 1990, while the rise in used cars and trucks was the biggest in more than one and a half years. Fed officials would like to see core inflation closer to 2 percent.

Wage growth remained benign, with average hourly earnings flat in June. In the 12 months through June, average hourly earnings rose 1.9 percent. In addition, capacity use at factories was unchanged at 76.7 percent in June, pointing to slack in the economy.

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