U.S. Economy: Confidence Drops as Gasoline Surges
By: Administrative Account | Source: Bloomberg
May 12, 2006 11:00PM EST

May 12 (Bloomberg) -- Surging gasoline prices drove U.S. consumer confidence down in May by the most since hurricanes battered the Gulf Coast last year. The University of Michigan said today its preliminary index of consumer sentiment fell to 79 from the final April reading of 87.4. The 8.5 percent-rise in crude oil prices in the past six weeks also means the trade deficit, which the Commerce Department said today unexpectedly narrowed in March, may widen again in coming months. Import prices increased in April, a third report showed today. ``When you look at how families are doing financially, their current financial situation has weakened quite a bit as they struggle to pay the gas prices,'' Richard Curtin, director of consumer surveys at the university, said in an interview. ``They expect continued increases over the next five years'' in gasoline prices, he said. The sentiment survey is the second report in as many days to question whether consumers, whose spending rose last quarter by the most in five years, will continue to drive the economy. Gasoline prices are up about a third this year, countering the effect of rising wages and a jobless rate that's near a five- year low. Consumer spending may already be softening after jumping the most since 2000 last quarter. Retail sales rose 0.5 percent in April, the Commerce Department reported yesterday, less than economists forecast. Spending increased at an annual rate of 5.5 percent in January to March. Sales were limited by higher gasoline prices, which increased 32 percent so far this year and averaged $2.96 a gallon in the week ended May 8, according to the U.S. Department of Energy. Inflation Concern ``There is a real bite on the consumer,'' said Roger Kubarych, senior economic adviser at HVB America Inc. and a former Federal Reserve economist. ``The connection between consumer confidence and high gasoline prices is obvious. The danger signs are out there.'' The advance in oil prices, which reached a record $75.35 a barrel last month, is also stoking concerns about accelerating inflation. The prices of goods imported to the U.S. in April jumped by the most in seven months, the Labor Department said in a separate report. Bonds Drop Treasury notes fell, pushing 10-year yields to the highest in four years. The yield on the benchmark note jumped 6 basis points to 5.19 percent at 3:38 p.m. in New York. Stocks fell on concern the Fed may have to add to its 16 interest-rate increases since June 2004. ``It sure looks to me like we are seeing some rising inflationary pressures,'' said Brian Wesbury, chief economist at First Trust Advisors LP in Lisle, Illinois. Oil prices may also worsen the country's trade balance. The shortfall in goods and services last month shrank to $62 billion, the smallest since August. The deficit is still the seventh-largest on record. The Michigan sentiment index was expected to decline to 86 this month from 87.4 in April, according to the median estimate in a Bloomberg News survey of economists. It hasn't fallen as much since September last year, when hurricanes Katrina and Rita hit Louisiana and Mississippi. The figure is the first of two monthly estimates provided by the University. Guide to Future The expectations index, which some economists view as an indicator of future consumer spending, fell to a preliminary reading of 68 from 73.4 in April. The current conditions gauge, which reflects Americans' perceptions of their financial situation and whether it's a good time to buy big-ticket items like cars, dropped to 96.2 from 109.2. U.S. consumers purchased 16.7 million vehicles at an annual rate in April, compared with 16.8 million for all of last year, according to Bloomberg data. ``This decline in confidence is not just due to higher energy prices, which would be a one- or two-month phenomenon,'' said Stephen Gallagher, chief U.S. economist at Societe Generale in New York. ``It's also the result of heightened concern about the housing slowdown and the increased dissatisfaction with the president, which may take more time to rebound from.'' Poll Slump People are also unhappy with their elected leaders, generally. President George W. Bush's approval rating fell to a record 31 percent in a CBS News-New York Times poll released May 9 and only 23 percent of respondents approved of Congress's performance. Seventy-three percent said the nation was on the wrong track in the survey of 1,241 adults taken May 4-8. Fifty-six percent said the U.S. ``should have stayed out'' of Iraq. Only 39 percent said going to war was the ``right thing'' to do. The labor market has until now helped support consumer confidence this year via faster wage gains and lower unemployment. The U.S. unemployment rate was 4.7 percent last month, compared with a 5.1 percent average last year. Hourly earnings in April were 3.8 percent higher than they were during the same month in 2005 - the most since August 2001, according to Labor Department data. Economists track the University of Michigan survey for hints to consumer spending, which slowed to an 11-year low of 1.1 percent in the fourth quarter of last year. Consumer spending helped push economic expansion to an annualized growth rate of 4.8 percent in the first quarter, the fastest pace in more than two years. ``Economic growth has been quite strong so far this year,' Fed policy makers said in a May 10 statement, after raising the nation's benchmark lending rate to 5 percent. They predicted growth would slow due to the ``gradual cooling of the housing market and the lagged effects of increases in interest rates.''

To contact the reporter on this story: Victor Epstein in Washington vepstein@bloomberg.net Last Updated: May 12, 2006 15:48 EDT