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By Jennifer Yousfi
Mirroring the stagflation of the early 1980s, consumer sentiment hit its lowest level since that time period this month as short-term inflation continues to ramp up.
The Reuters/University of Michigan preliminary index of consumer sentiment dropped to 59.5 in May from 62.6 in April. The index is at its lowest level since June 1980. Consumer confidence was at 85.6 as recently as 2007.
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"The consumer is getting extremely grumpy," Brian Bethune, director of financial economics at Global Insight Inc., who had forecast a decline in the confidence index to 59.6, told Bloomberg News. "The economy is flirting with a recession. The only thing keeping it out is this huge amount of pump-priming going on," including aggressive interest-rate reductions by the U.S. Federal Reserve, the government's stimulus package and deep discounting by retailers.
Lower-income households are feeling the rising prices at the pump and grocery store most acutely, the survey showed, as such households were the main cause for the index’s fourth consecutive monthly decline.
The confidence index was well below economists' median expectation of a reading of 62.0, according to a Reuters poll, the news service reported.
"Consumer confidence continued to slip in early May due to surging food and fuel prices," the Surveys of Consumers statement said according to Reuters. "Record numbers of consumers viewed the economy in recession and saw little hope of recovery anytime soon."
Consumer spending provides the bulk of U.S. gross domestic product, but a deteriorating housing market coupled with high food and fuel costs are eating away at household discretionary income.
The $117 billion in tax-rebate checks mailed to consumers as part of the Bush administration's stimulus plan should lead to a rebound in spending in the third quarter, followed by a deceleration by year-end, a Bloomberg poll showed.
News and Related Story Links:
- Bloomberg News:
U.S. Consumer Sentiment Decreases to 28-Year Low
- Money Morning:
Consumer Sentiment Battered by High Fuel, Housing Slump