Consumers Losing Confidence In Economic Rebound

Consumers are not in a very good frame of mind heading into the summer vacation months. The Conference Board's Consumer Confidence Index for May is down 5.2 points to 60.8, the lowest level in six months.

Weighing on consumers minds is the high price of gasoline and the uncertain outlook in the labor market. Economist Joel Naroff, of Naroff Economic Advisors, in Holland, Pa., calls the report “ugly.”

“The spring of our gasoline price discontent is showing up in the attitudes about the economy,” Naroff said. “The sharp drop in the overall outlook on the world was driven by a deteriorating view about future economic prospects. More people thought activity would worsen and fewer expected it to improve.”

The negative outlook was also apparent in the labor market numbers, as people are less optimistic about getting a job over the next few months.

Consumer spending

While consumer spending has held up for most of the year, the report suggests it's an open question whether than continues through the rest of the year.

“The decline in optimism has to be driven largely by skyrocketing energy and rising food costs,” Naroff said. “These are high frequency purchases and people watch their wallets empty out on a weekly basis when they go to the gasoline station or the supermarket.”

Naroff says most Fed members are more concerned about the negative growth implications of the jump in prices than the impact on inflation. It all depends, he says, on what happens with one particular commodity.

“If gasoline costs do come down as much as many are expecting, then the negative impact on spendable income and confidence will dissipate and consumption will rebound,” Narofff said. “But we will have to wait for the summer economic numbers to see if that happens.”

For the time being, he says, don't expect second quarter economic growth numbers to be very good. At least, not good enough to make consumers feel a little more confident.