Consumer Confidence Drops
U.S. consumer confidence sank in August and Chicago-area business activity slowed, according to reports Tuesday that added to worries that sluggish economic growth may last beyond the summer.
A four-month slowdown in hiring and record oil prices took a bite out of confidence, with the Conference Board’s monthly index falling more than 7 points in August to 98.2 from a revised 105.7 in July. The reading was well below economists’ forecasts of a smaller slip to 103.5.
“A reacceleration in hiring is needed to bolster consumer attitudes about the economy. More jobs will also generate faster income growth that will support consumer spending,” said Steven Wood, chief economist at Insight Economics in Danville, Calif. “A lot is riding on companies hiring more workers.”
Consumer hopes soured on the current state of the economy and the outlook, with the present situation index sliding to 100.7 in August from 106.4 the previous month. The expectations index also fell sharply, to 96.6 from 105.3.
A separate report showed growth at Midwest businesses easing in August, with the National Assn. of Purchasing Management-Chicago’s index falling to 57.3 in August from 64.7, deeper than the retreat to 60.8 economists had forecast.
The declining numbers cast new doubts on the pace of growth ahead. With income gains stagnating, more economists are beginning to question the outlook for consumer spending, which powers two-thirds of the economy. Even as spending rebounded in July, it was fueled by sparse savings or credit rather than income.
Even with the signs of growth slipping below the economy’s full speed and reduced hiring, Federal Reserve officials have said they intend to keep hiking interest rates because they view the current 1.5% federal funds rate as too accommodative.
Many economists believe that stronger employment growth is needed for the central bank to keep hiking rates. Friday’s August employment report is expected to show a 160,000 gain in nonfarm payrolls, up from July’s meager 32,000 increase.
The NAPM-Chicago index still represented historically strong activity, and economists said some moderation was expected given the sharp run-up in energy prices. Crude oil hit nearly $50 a barrel less than two weeks ago before pulling back to about $42.
The Chicago prices index rose to a 16-year high of 86.6 from 77.6 in July. Economists said the rise represented not just higher energy costs but price pressures from other commodities.
The components of the NAPM-Chicago may point to even less growth ahead. Even as the employment index showed more hiring, indexes of production, new orders and backlog orders all fell. That suggests less production will be needed in the future to meet demand.
