PhotoThe dog days of summer find consumers feeling much less confident about the economy. The Reuters/University of Michigan index of sentiment declined this month to 72.3 -- the lowest level of the year.

Unemployment is still high, stuck at 8.2 percent. Gas prices have started going up again after falling for several months. The drought promises to make food more expensive next year and, in fact, some food items are already going up in price.

Nearly half of all consumers reported in July that their finances had recently worsened, with equal numbers attributing the decline to lower incomes and to higher prices. Complaints about rising prices have shifted from gas to food prices. Just 10 percent of all consumers expected any inflation-adjusted gains in their incomes in the next year, and just 22 percent thought there was a better than even chance of real income gains over the next five years.

Depressing news

Consumers who follow the news may also be influenced by the daily dire warnings about Europe's staggering debt and the warnings of a “fiscal cliff” looming in the U.S. at the end of the year if Congress doesn't find a bipartisan agreement to trim the deficit.

“Consumers expect continued economic stagnation since they believe that current economic policies are incapable of solving the problems facing the economy,” said Richard Curtin, the Index's chief economist. “While politicians continue their semantic posturing about how and when the fiscal cliff will be bridged, consumers have begun to take precautionary steps. Although politicians understand that no consumer likes this game of chicken, they have pinned their political hopes on the other party being blamed, while ignoring the economic consequences of inaction. Even a temporary extension would decrease the impact of uncertainty on consumer spending in the second half of the year.”

Not as dark as they seem?

But just how bad are things, really? Perhaps not as bad as they might seem.

The U.S. government today reported Gross Domestic Product (GDP), the sum total of goods and services sold in the U.S., grew by 1.5 percent in the second quarter, while the first quarter growth was revised up to 2.0 percent. That's not particularly inspiring except that it's better than a lot of forecasters expected and is better than much of the rest of the world is doing.

At the same time, the real estate market appears to be in the beginning stages of righting itself after four years of carnage. The real estate site reported this week that the market had finally bottomed, with the national average price of a home rising for the first time in four years.

Consumers are basically saying they'll believe it when they see it. The Reuters/Michigan Index shows consumers do not expect the pace of economic growth to revive job and income prospects. Curtin says consumers never willingly choose to lower their aspirations; that change is slowly forced on them by unrelenting adversity.

The greatest concern to consumers is that wage and job growth will remain depressed in the foreseeable future, and that these meager gains are likely to be diminished in the years ahead by rising taxes and benefit cutbacks.

Share your Comments