Consumer Still Focused on Jobs - TheStreet

Consumer Still Focused on Jobs

The Conference Board says its confidence index unexpectedly slipped this month.
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Updated from 10:59 a.m. EDT

An unexpected downturn in American consumer sentiment is more evidence that even with tax cuts on the way and the stock market rebounding, jobs remain the most important thing.

The Conference Board's consumer confidence index fell in July to 76.6 from 83.5 in June. In March, war jitters brought the index down to 61.4, its lowest reading since October 1993, but by May, it had risen to 83.6. Now, for the last two months, the index has been slipping again.

This time, it caught Wall Street off-guard. According to consensus estimates, economists expected the index to rise to 85.0 in July. They were off by 8.4 points.

"We've seen that jobs were harder to get in July than they were in June," said Lynn Franco, the director of the Conference Board's Consumer Research Center. "Until you have sustainable job growth in the economy, consumers aren't going to be happy."

The components of the report show that consumers, whose propensity to keep spending throughout the economic downturn has been largely responsible for keeping the economy afloat, are concerned about the present and the future. The present-conditions index dropped to 61.9 from 64.2, and the expectations index tumbled to 86.4 from 96.1.

Consumers anticipating more jobs to become available over the next six months declined to 16.8% from 18.9%, while those expecting fewer jobs increased to 19.8% from 16.9%. The proportion of consumers expecting an increase in their incomes declined to 15.7% from 17.1%. The federal government's employment report is due out on Friday.

Despite the news, Oscar Gonzalez, a senior economist at John Hancock Financial Services, points out in a report that jobs are a lagging indicator and other economic indicators suggest that the economy is on the mend.

"The jobless recovery is taking a bite out of consumer confidence," he wrote. "However, as long as it doesn't take a bite out of consumer spending, I think we'll be fine. Nothing is quite as frightening as the prospect of losing your job and not being able to find another. We've seen so little good news from the labor market for most of this year that it's not terribly surprising that people may be starting to lose faith."

Gonzalez thinks the economy will continue to improve for the rest of 2003. "In the short term, I'm not worried about consumer spending," he wrote. "Certainly, confident consumers are more likely to spend more than disheartened consumers. We know, however, that happy or sad, as long as they have money in their pockets, American consumers spend. Tax-cut checks may soon be arriving in people's mailboxes and that can only help."

Now, Wall Street is waiting for the federal government's advance gross domestic product report for the second quarter of 2003 and the employment report for July, due out Thursday and Friday respectively, for news on any economic recovery. Economists predict that the American economy grew 1.5% in the second quarter compared with 1.4% in the first quarter, and that the unemployment rate sank from 6.4% in June to 6.3% in July, with 10,000 jobs added to payrolls. They also anticipate that personal spending in June grew 0.4% compared to 0.1% in May.

Richard Hastings, a vice president and chief retail analyst at Bernard Sands, does not put much stock in the numbers released by the government. "There are some basic truths out there, I think, that those statistics don't capture," he said. For him, many warning signs still exist despite small improvements in many of the economic indicators. The private sector is still worried about overcapacity and pricing power remains weak.

Furthermore, the U.S. labor market remains plagued by rising costs and stiff competition from foreign labor markets. He points out that once a job is lost, it takes a long time to replace it in this economy, and that lag-time will hamper consumer spending.

"I do not expect any significant, long-term improvements in the job market this year," he said.