Gauge of Consumer Sentiment Drops to 2006 Low

U.S. consumer sentiment dropped more than expected in early August, registering its lowest reading since just after Hurricane Katrina, a report indicated Friday.

Turmoil in the Middle East and higher gasoline prices in the first half of August also raised consumers’ expectations for inflation, a potentially troubling sign for the Federal Reserve.

The University of Michigan’s preliminary reading of consumer sentiment in August was 78.7, down from July’s final reading of 84.7, people who saw the subscription-only report said. The median forecast of Wall Street economists polled by Reuters was 83.6.

“It’s a very ‘stagflationary’ kind of result,” said Peter Kretzmer, senior economist at Banc of America Securities in New York. “This is a larger downward move than what we’ve seen even though gasoline prices haven’t moved that much higher in the month of August.”

The average price of gasoline hit $3.03 a gallon at the end of last week, the highest ever recorded by the Lundberg industry survey. But it should begin to fall as the summer driving season comes to an end, it said.

The University of Michigan’s index of current conditions fell to 100.8 from 103.5 in July while the index of consumer expectations slid to 64.5 from 72.5.

Confidence measures have traditionally been used to help predict consumer spending, which accounts for about two-thirds of U.S. economic activity, but in recent years confidence indexes have been a weak guide to actual spending.

Recent housing data showing a sector that is rapidly cooling have been weighing on consumer confidence, analysts said.

The Economic Cycle Research Institute, an independent forecasting group, reported Friday that its weekly index of U.S. economic growth ticked up slightly. But the index’s annualized growth rate hit its lowest level in almost two years, falling in the latest week to minus 1.4%.

The previous week’s rate was negative 0.8%, revised downward from 0.4%.

“With weekly leading index growth now at a 93-week low, U.S. economic growth prospects continue to dim,” said Lakshman Achuthan, a managing director at the research institute.

Trading in U.S. interest rate futures after the University of Michigan release briefly reflected a reduced chance of a September rate hike by the Fed, but the implied odds of a hike returned to 18% after investors digested the data, which showed that consumers had increased their expectations for inflation.

The report’s preliminary August reading of one-year U.S. inflation expectations was 4.2%, up from 3.2% in July. The median expectations for inflation over a five-year horizon rose to 3.1% from 2.9%.

The Fed has cited contained inflation expectations as support for its view that inflation is moderating.