Drops in Consumer Confidence, Prices Temper Recovery Hopes

By Frank Ahrens
Washington Post Staff Writer
Saturday, August 15, 2009

Darkening consumer confidence and plunging prices combined with a generally dismal outlook to dampen hopes for a quick economic recovery.

According to the monthly Reuters/University of Michigan Surveys of Consumers, released Friday, the index of consumer confidence fell from 66 points in July to 63.2 in August. The decline itself is less meaningful than the fact that economists expected consumer confidence to rise in August. This means the experts underestimated the pessimism of American consumers, which helped send the stock market down Friday.

"Consumers are facing three major hurdles," Art Hogan, chief market strategist at Jefferies & Co., said in an interview. "They are paying down their debt, their houses are not worth as much as they were two years ago and they're staring down the barrel of 10 percent unemployment."

As a result, Hogan said he expects the five-month stock market rally to "hit a bumpy patch."

Also on Friday, the Labor Department reported that July consumer prices remained stable compared with June but plunged 2.1 percent from July 2008.

Friday's tough consumer news followed a surprise drop in July retail sales and a record jump in home foreclosures reported earlier this week. At the same time, Hong Kong emerged from a yearlong recession on Friday, joining Germany and France, whose economies grew modestly in the second quarter.

Taken together, the week's economic data suggest that a global recovery will be staggered and sluggish in getting off the ground. Consumers -- the engine of the U.S. economy -- are catching few breaks.

Long-term price drops stoke fears of deflation -- the opposite of inflation and a warning sign of a contracting economy. Plunging prices typically go hand in hand with declining wages, creating the sort of persistent misery seen during the Great Depression.

But economists noted that the yearlong drop in consumer prices resulted largely from the plunge in oil prices, which hit a high of $147 per barrel in July 2008 and traded at less than half that on Friday. The average national price per gallon of regular gasoline, which peaked at $4.11 last summer, now stands at $2.65, according to automotive club AAA.

Excluding highly volatile energy and food prices, prices actually rose 1.5 percent over the past 12 months.

"I don't fear deflation," said Dartmouth College economist Douglas A. Irwin. "Most economists are wary about future inflation because the [Federal Reserve] has pursued such an expansionary monetary policy." By lowering interest rates to near zero in order to prop up the economy over the past year, the Fed has flooded the market with new money, which typically lowers the value of each dollar in circulation and fuels inflation.

But that has not come true so far, and it worries Hogan a little. Flat prices have forced economists and traders into the unusual position of hoping for a healthy dose of inflation.

"I generally would like to see a little inflation" to stave off fears of spiraling price plunges, Hogan said. "I'm not overly concerned, but I'm starting to get there."

The consumer confidence survey contained two notable findings: the lowest number of consumers in the survey's 60-year history said their personal finances are improving. Many said their net wealth is being hammered by unemployment, shorter hours and diminutive wage gains.

Also: "Consumers reported much less favorable assessments of their personal finances even as they were more likely to expect improved conditions in the national economy," the survey's authors said in a statement, highlighting the difference between the perception of economic recovery and actual recovery.

Stocks are down about 30 percent from their October 2007 high, but savers have enjoyed watching their depleted 401(k)s fill back up since the early March market bottom. Since then, the Dow Jones industrial average is up 43 percent, the broader Standard & Poor's 500-stock index has risen 50 percent and the tech-heavy Nasdaq composite index has jumped 58 percent.

But Friday's pullback was sharp, and it ended a four-week winning streak for the markets. The Dow closed down 0.8 percent for the day, the S&P 500 was off 0.9 percent and the Nasdaq fell 1.2 percent.

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