Recent Plunge in Consumer Confidence a Worrying Sign

by: RetailSails

After climbing to a nearly three-year high at the end of February, recent readings on consumer confidence have plunged as surging gas prices have offset improvements in the economy and consumers’ personal finances. As inflation expectations continue to rise, there are worrying signs that shoppers are already beginning to tighten their wallets.

After climbing to its highest level since April 2008 at the end of February, the Bloomberg Consumer Comfort Index has plunged 22.5% over the last two weeks and now sits at its worst level since the week ending August 1st. The Index dropped to -48.5 for the week ending Mar 13th from -44.5 the prior week. Views on the state of the economy fell sharply for the second straight week, to -80.3 from -76.8, while perceptions of personal finances decreased to -7.7 from -3.7 and confidence in the buying climate fell to -57.4 from -53.0.

Bloomberg Consumer Comfort Index

(Click charts to expand)

The report is “showing trouble across the board,” Gary Langer, president of Langer Research Associates LLC in New York, which compiles the index for Bloomberg, said in a statement. “While global disruption from the crisis in Japan to the unrest in the Middle East can’t help, the most likely proximate cause is the price of gasoline.”

The average price of gas at the pump rose another 5 cents last week, and has increased over 12% just in the last three weeks. Based on an annual pump price of $3.61 per gallon, the U.S. Energy Information Agency (EIA) estimates the average household will spend about $700 more this year on gasoline, with total auto fuel expenses up 28% from 2010 to $3,235.

  • The Price at the Pump Doesn’t End at the Pump: How Rising Gas Costs Can Impact Retailers (Nielsen)
  • Rising Gas Prices, Declining Dollars and the Household Budget Impact (Nielsen)
  • Increasing gas prices to cause pullback in consumer spending (Quantum Retail)

Food prices are surging as well. Cold weather forced stores and restaurants to pay more for everything from vegetables to meat and dairy, causing food prices at the wholesale level to rise last month by the most in 36 years.

While gas and food inflation will have the largest effect on low-income consumers since those items make up a much larger percentage of their budgets, Bloomberg also said that confidence among households with annual incomes exceeding $100,000 fell to the lowest level since November.

“Consumers across different income and demographic groups are feeling the pain of rising prices at the pump,” said Joseph Brusuelas, a senior economist at Bloomberg LP in New York. “It’s even biting those making more than $100,000, and they’re the ones who’ve been a primary driver of the recovery. It’s likely to restrain growth this quarter.”

The preliminary reading for March on the Reuters/University of Michigan Consumer Sentiment Index reflected similar danger signs. After climbing to a 3-year high in February, the index plunged to its lowest level in five months, falling to 68.2 in March from 77.5, as consumers’ 12 month inflation expectations jumped to 4.6%, the highest since August 2008.

Reuters/University of Michigan Index of Consumer Sentiment

The fall was almost entirely due to an 18.6% month-over-month drop in the Consumer Expectations Index, which declined to 58.3 from 71.6 in February, the lowest since March 2009.

Meanwhile, the Deloitte Consumer Spending Index ticked up in February as slight improvements in real home prices and initial jobless claims offset inflationary dollars. However, future gains in both wage growth and discretionary spending are at risk from rising energy prices.

“Despite the small gains in the Index, the recent sharp rise in energy prices could weaken consumer purchasing power in the months ahead,” said Carl Steidtmann, Deloitte’s chief economist and author of the monthly Index.

Finally, Bill Martin of ShopperTrak had this to say last week: “There is a risk that if the current rate of increase in gasoline prices continues, the economic recovery could stall as consumers and businesses become more uncertain about the future and thus more cautious with their spending. We will be watching this situation closely in the coming weeks.”

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.