Sentiment Buoyed by Lower Oil, But Consumers Still Certain of Recession

By Jennifer Yousfi
Managing Editor

Consumer sentiment improved for the second consecutive month, as lower commodities prices picked the index of consumer confidence up from a 28-year low.

The Reuters/University of Michigan Surveys of Consumers announced its index of consumer confidence inched up a half-point to 61.7 in early August from 61.2 in late July. However, the index fell just shy of economists' median forecast of 62.0, according to a recent poll conducted by Reuters.

Consumers still remain pretty pessimistic,” Arun Raha, a senior economist at Swiss Re (OTC ADR: SWCEY) in New York, said in an interview with Bloomberg Television. “This little-higher number is probably the result of lower gas prices. The economy remains pretty weak and consumer sentiment reflects that.”

The index has climbed back from 56.4 in June, its lowest level since May 1980. Any improvement in consumer confidence, however slight, is good news for a U.S. economy that continues to precariously vacillate on the edge of an official recession.

A drop in oil from its July 11 high has led to an 8% decline in prices at the pump, boosting consumer moods and slightly easing overstrained household incomes. [Please click here for a related story on oil prices in today’s issue of Money Morning.]

The decline in oil and other commodities prices also led consumers to lower their inflation expectations to 4.8% over the next year, down from 5.1% in both the June and July surveys.

While consumers are slightly more optimistic, that sentiment is not likely to translate into increased consumer spending, especially as it comes on the heels of a U.S. Labor Department report that indicated the largest-decline in inflation-adjusted wages in 17 years.

A very weak trend for consumer spending is the most likely scenario,” said Josh Shapiro, an economist for MFR Inc., MarketWatch reported. 

With consumer spending accounting for 70% of U.S. gross domestic product, the outlook for the U.S. economy is far from bright.

“There is little doubt among consumers about the likelihood of a recession,” Richard Curtin, director of the surveys, said in a statement.

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