Credit Commentary

Consumer confidence tumbles again

By Zarana on Friday, July 31 2009

United States high unemployment rate impacted consumer confidence again in July, the second straight month that people's faith in the economy has wavered.

The New York research firm, Conference board, reported a decline in monthly index to 46.6 from 49.3 in July. The index is a combination of consumers’ perceptions of current economic conditions and their expectations for the future, both of which fell in the latest survey. There is also a concern for spending here as the consumers are pessimistic about their income expectations.

A major factor influencing nation’s consumer confidence is the mounting unemployment rate, which is expected to rise through 10% in near future, with 15 states already reporting 10% or greater unemployment. Widespread job losses and income concerns weighed on U.S. consumers, keeping economic confidence down in July

The decline is the second consecutive drop in consumer confidence following three months of increases. The index stood at 54.8% in May before falling. Moreover, consumers expecting an improvement in the job market fell to 15% from 17.5% in June, while those expecting the market to further worsen fell to 26.3% from 27.6%

Moreover, consumers' short-term expectations remain at a very low level. Consumers expecting business conditions to improve over the next six months decreased to 18.9% in July from 20.4% in June.  While those expecting conditions to worsen dipped to 18.9% from 20.4%.

Prices for most commodities fell amid a stronger dollar and a report suggesting consumers are still nervous about the economy. Also, metals and energy prices took the biggest beatings after the weak consumer confidence report hit the US market. Sagging consumer confidence means Americans are likely keeping their wallets closed, which could hurt the economy's ability to rebound. Prices for commodities suffer when demand for basic materials and other goods is weak.

In addition, the unexpected drop in consumer confidence also put a damper on stocks, sending the Dow Jones industrials and the S&P 500 index down in late afternoon trading that day. Like commodities, stocks had been on an upswing since earlier this month due to a string of better-than-expected corporate earnings reports. Analysts have been anticipating a pullback in both stocks and commodities following their recent run.

On the other hand, the S&P Case Shiller index rose for the first time in over 3 years on month to month basis and the Richmond Fed index surprised sharply to the upside showing the signs of recovery in the housing market. Additionally, Bank of America announced that it would be shutting close to 10% of its branches indicating that US unemployment rate is likely to rise further. To sum up, the market is sending mixed signals to the investors.