Consumer Sentiment in U.S. Drops on Gasoline Prices: Economy

Confidence among US consumers unexpectedly dropped in March due to the 17% jump in gasoline prices. Since gasoline is a common purchase, this price rise threatens to squeeze household budgets. A new government reports showed that CPI rose most in 10 months with gasoline accounting for 80% of that increase.

By Shobhana Chandra
Mar 16, 2012 9:31 AM MT
Bloomberg

Confidence among U.S. consumers unexpectedly dropped in March as this year’s 17 percent jump in gasoline prices threatens to squeeze household budgets.

The Thomson Reuters/University of Michigan preliminary index of consumer sentiment fell to 74.3, the lowest this year, from 75.3 the prior month. The gauge was projected to rise to 76, according to the median forecast of 70 economists surveyed by Bloomberg News. A government report today showed that consumer prices rose in February by the most in 10 months, with gasoline accounting for 80 percent of the increase.

The sentiment gauge contrasts with the Bloomberg Consumer Comfort Index, which climbed last week to the highest level since 2008. Reports this week showed claims for unemployment benefits declined, matching a four-year low, and retail sales rose in February by the most in five months, indicating households are weathering the increase in fuel costs.

“The rise in gasoline prices appears to be a worry but not a game-changer yet,” said Michael Gapen, a senior U.S. economist at Barclays Capital Inc. in New York, who predicted the sentiment index would drop to 74. “Households are saying ‘yes, gasoline takes a bit out of my pocket, but other energy costs are lower, and the labor market looks better so incomes will rise.’”

Stocks held gains after the reports. The Standard & Poor’s 500 Index rose 0.2 percent to 1,404.65 at 12:21 p.m. in New York. The yield on the 10-year Treasury note climbed to 2.31 percent from 2.28 percent late yesterday.

Economist Estimates

Estimates for the confidence measure ranged from 72.5 to 78.5, according to the Bloomberg survey. The index averaged 64.2 during the last recession and 89 in the five years before the 18-month slump that ended in June 2009.

The consumer-price index climbed 0.4 percent in February, matching the median forecast of economists surveyed by Bloomberg, after increasing 0.2 percent the prior month, figures from the Labor Department showed today. The so-called core measure, which excludes more volatile food and energy costs, advanced 0.1 percent, less than projected.

Americans are growing more concerned about the rising cost of living, today’s confidence survey showed. Consumers said they expect an inflation rate of 4 percent over the next 12 months, the highest since May, compared with 3.3 percent in the prior survey.

Fuel costs may be the culprit. The average price of a gallon of regular gasoline at the pump rose to $3.83 on March 15, the most since May, according to AAA, the nation’s biggest motoring organization.

Prices Feel ‘Miserable’

“Miserable,” said Kevin Lawn, 34, an electrician from Monrovia, Maryland. “That’s how gas prices feel.”

Lawn said his 13-year-old son will probably have to curtail his trips to competitive motocross races because of the price of gasoline. “This past weekend I spent $300 in fuel costs just to go to North Carolina,” he said.

At the same time, an improving labor market is giving Americans cause for optimism. Payroll growth in February capped the best six months since 2006, and the unemployment rate stayed at 8.3 percent, a three-year low.

A record 38 percent of those polled in the confidence survey said the most important economic development was an increase in employment. Asked about their view of the jobless rate in the year ahead, respondents were the most optimistic since 1984.

How Americans perceive the outlook varies by income. Households making less than $75,000 a year were less likely to say the economy will keep improving, while those with higher salaries were more optimistic.

Stock Gains

Stocks are also giving consumers a lift. The S&P 500 is on pace for the best first quarter since 1998, after rallying 12 percent this year through yesterday.

Don Johnson, vice president of U.S. sales operation for General Motors Co. (GM), said consumers are likely to withstand the rise in gasoline prices as the economy improves.

“American consumers and the overall economy are in much better shape than they were a year ago,” Johnson said on a March 1 conference call. “Based on what we see in terms of pent-up demand and importantly the strength of the economy, we do not believe that short-term fluctuations in pump prices will curtail industry growth this year.”

Republicans seeking their party’s nomination for president, including former House Speaker Newt Gingrich, blame President Barack Obama for the increase in energy costs.

Obama countered yesterday that his detractors are “stuck in the past.”

Solar, Wind

“They dismiss wind power; they dismiss solar power; they make jokes about biofuels,” Obama told students at Prince George’s Community College in Largo, Maryland, outside Washington. “They were against raising fuel standards. I guess they like gas-guzzlers.”

The Michigan survey’s index of current conditions, which reflects Americans’ perceptions of their financial situation and whether it is a good time to buy big-ticket items like cars, climbed to 84.2 from 83 the prior month.

The index of consumer expectations for six months from now, which more closely projects the direction of consumer spending, dropped to 68 from a one-year high of 70.3.

A separate report today from the Fed showed industrial production was little changed in February as automakers cut back following a surge the previous month and mining declined.

Output at factories, mines and utilities fell short of the median projection in a Bloomberg News survey of economists that called for a 0.4 percent gain. January production was revised to a 0.4 percent increase, previously reported as no change. Factory production, which makes up about 75 percent of total output, rose at the slowest pace in three months.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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