Retail Sales Rise, but Pessimism Drives Consumer Sentiment to a 30-Year Low

Consumer sentiment, which hit its lowest since 1980 when the economy was in recession, fell on fears of a stalled recovery combined with gloom from partisan bickering over government debt, the Thomson Reuters/University of Michigan’s consumer sentiment survey reported.

The preliminary August reading on the consumer sentiment index fell to 54.9 in early August, down from 63.7 in July, and has fallen for three months. The August reading was well below the median forecast of 63.0 among economists polled by Reuters.

However, retail sales climbed 0.5 percent in July, the biggest increase since March, after a revised 0.3 percent gain in June, according to the Commerce Department.

“People’s spending doesn’t always correspond with their mood,” said Stephen Stanley, chief economist at Pierpont Securities in Stamford, Conn. “I doubt things are as weak as the sentiment readings suggest, but no doubt people will be cautious in August.”

High unemployment, stagnant wages and the protracted debate in Congress over raising the government debt ceiling alarmed consumers in the University of Michigan survey even before the downgrade of United States sovereign debt by Standard Poor’s. The consumer sentiment index registered most of the decline before the credit rating downgrade on Aug. 5.

“Never before in the history of the surveys have so many consumers spontaneously mentioned negative aspects of the government’s role,” the survey director, Richard Curtin, said in a statement.

“This was more than the simple recognition that traditional monetary and fiscal policy measures were largely spent. It was the realization that the government was unable or unwilling to act,” Mr. Curtin added.

Bad economic times were expected by 75 percent of all consumers in early August, just below the record peak of 82 percent in 1980. Buying plans for household durables and vehicles declined in early August, falling back to their recession-level lows.

“Obviously this is quite an ugly number,” said Peter Cardillo, chief market economist at Rockwell Global Capital in New York.

“How could you have hopes for anything less than what we got, with the markets being in turmoil, the fear, and the U.S. being downgraded? It took the wind out of the stock market a bit, but I don’t think it will be that meaningful.”

However, retail sales in July posted the biggest gain since March, tempering fears that the nation’s economy might be slipping back into recession.

The 0.5 percent increase was in line with analysts’ forecasts and followed an upwardly revised 0.3 percent gain in June.

Excluding autos, sales increased 0.5 percent, well above forecasts for a 0.2 percent gain. The figures were bolstered by a 1.6 percent increase in gasoline station sales, in part reflecting the higher cost of fuel. Retail sales excluding autos, gasoline and building materials rose 0.4 percent.

In another report, the Commerce Department said business inventories rose slightly less than expected in June, suggesting firms remained cautious about future demand at the end of the second quarter. Inventories climbed 0.3 percent, after a downwardly revised 0.9 percent rise in May, the report said. Economists had expected a rise of 0.5 percent in June.

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