So much for optimism. A dramatic drop in consumer confidence sent stocks plunging yesterday and left a key index at its lowest level of the year, heightening fears that the economic recovery is stalling.
The nation is in no mood to spend its way back to growth, but businesses have been cautiously building up inventories to prepare for increasing demand as the economy improves. Now they’re left with a question: Who’s going to buy all the cars, dishwashers and clothes heading to stores and showrooms?
The Consumer Confidence Index came in at 52.9 in June, a jarring decline from 62.7 in May, according to a survey released Tuesday by the Conference Board, a private research group. It was the biggest drop since February and came on top of several gloomy economic developments in recent days.
“We need the consumer to spend, and right now declining confidence is not the prescription for a stronger economy,” said Joel Naroff, president of Naroff Economic Advisors. “This was a bad report, no matter how you slice it.”
Generally, a reading above 90 indicates the economy is on solid footing. Above 100 signals strong growth. The index, based on a survey mailed at random to 5,000 households, hasn’t come in above 90 since the recession began in December 2007.
Economists watch the number closely because consumer spending, which includes not just merchandise but expenses like health care, accounts for about 70 percent of U.S. economic activity and is critical to a strong recovery.
The confidence report rattled Wall Street. The Dow Jones industrial average closed down nearly 270 points, falling below 10,000 for the first time since June 10. The Standard & Poor’s 500 index fell 33.33, or 3.1 percent, to 1,041.24, its lowest close since Oct. 5.
Investors were already skittish for many reasons, including signs that China’s economy is slowing, recent disappointing reports on jobs and housing and and weekend pledges by leaders of the world’s richer nations to cut their deficits in half by 2013.
Another new report showed home prices rose in April, but investors mostly wrote it off. April was the last month of a tax credit for homebuyers, and almost all other gauges of the housing market have slowed considerably since it expired.
Businesses from automakers to appliance manufacturers have been slowly replenishing their inventories since late last year, helping the economy to expand.
The confidence report suggests shoppers are clamping down. In fact, Americans saved more money in May even as their paychecks grew.
In another troubling sign, forecasters expect U.S. auto sales to decline for June after growing every month since January. The Conference Board’s report showed that fewer people surveyed plan to make many major purchases, from homes and autos to refrigerators, over the next six months.
Jacqueline Murphy, 46, of Ypsilanti Township, Mich., plans to keep her car longer because of the uncertain economy. Murphy, who drives a 2003 Chevrolet Malibu, is a leasing agent for an apartment complex in foreclosure. She isn’t sure what’s coming next.
“I’m not looking for anything that’s going to give me a bill,” she said while getting a tire replaced on her car. “I’m in a process where my job could end in a matter of days.”
The second half of this year is critical for the economy. The impact of massive government stimulus spending will wear off. Two big subsidies, the one for homeowners and another for car buyers, have already disappeared.
That’s why many analysts predict the economy’s growth will slow in the second half to a subpar 2 percent, from a modest 3 percent in the first half. And an economy that fragile is vulnerable to shocks that could send it into reverse.
“The more evidence that we get that consumers are losing their confidence and growing more tentative about things, the odds of a double-dip recession start to rise a little bit,” said Tim Quinlan, economist at Wells Fargo.
He and other economists still think the chances of a double dip are relatively low, but concern is growing. Europe’s debt crisis has spooked Wall Street, taking a bite out of Americans’ stock portfolios. And unemployment is still stuck at nearly 10 percent.
Unlike other recoveries, this one hasn’t been powered by consumer spending. Instead, it has been mostly supported by businesses restocking inventories that dwindled during the recession, and by spending overseas and by the government.
President Barack Obama made a renewed plea to Congress on Tuesday to revive efforts to extend unemployment benefits. The House on Tuesday rejected a $34 billion bill that would have extended benefits through November. It also voted to give homebuyers three more months to complete purchases in time for the tax credit.
The president – following a White House meeting with Federal Reserve Chairman Ben Bernanke – expressed confidence the recovery will stay on track. He acknowledged the economy faces threats.
“We’re now seeing some headwinds and some skittishness and nervousness on the part of the market and on the part of business and investors,” he said. “We’ve still got a lot of work to do.”
– Associated Press