July proves disappointing consumer sentiment reading

07-11-2009 13:12

Reuters and the University of Michigan published a report which proved that consumer sentiment in July turned out quite disappointing, partly caused by anxiety regarding the job market. The report demonstrated that the initial July consumer sentiment index resulted in a 64.6 reading, while June’s last reading was at 70.8. The forecasts by economists pointed to a rather reserved reading of 70.0.

Considerable deterioration in expectations

Reuters/ University of Michigan Surveys of Consumers commented: “Consumers determined that the financial crisis would continue for a longer period and the recovery of their personal financial situation would take up more time than they estimated.” The sharp decrease of the index was mainly caused by outlooks dropping from 69.2 in the previous month to 60.9 in July. Additionally, the present consumer condition index dropped from 73.2 in June to 70.4 in July.

Disappointment

“The falling present conditions are a result of disillusionment regarding the large decrease of the payrolls in June, which were not expected, and due to unemployment expanding to 9.5%, both economic figures were highlighted in the media,” according to Chris Low, chief economist for FTN Financial. “Nevertheless, outlooks declined more than present consumer conditions, implicating that the cap and trade and healthcare reform bills, which dominated the news at the end of May, could have weighed even more on the confidence,” Chris Low commented. The possibility of tax increases, linked with the cap and trade and healthcare reform attempts, have been regularly questioned by the Republicans in the last weeks.

Effectiveness Obama's stimulus

John Boehner, house minority leader in the 111th Congress, stated this week that Democrats should cancel “employment-destroying lawmaking”, such as a nationalized health care system and state energy taxes, in case they aim on generating and protecting employment. The effectiveness of Obama’s stimulus plan have been repeatedly criticized by the Republicans and they suggested the execution of a GOP plan (Grand Old Party, nickname of the US Republican political party), which aims more on support for small businesses.

Function independently

Jack Ablin, chief investment officer of Harris Private Bank, stated that the decline in consumer sentiment should not be linked with a failing stimulus plan. Ablin believes that the stimulus will be really effective if they merge into the natural economy. “Stimulating the economy is one thing, but the economy needs to be able to function independently,” he noted, “It still is uncertain if this stimulus is really mounting into the natural economy.” The Reuters/ University of Michigan demonstrated that the five-year outlook, regarding inflation, increased 0.1% to 3.1%, while the one-year outlook dropped 0.1% to 3%.