Main Street Not So Confident

by: Wall Street Strategies

By Carlos Guillen

Equity markets were up nicely during Friday's trading session, mainly as a result of signs from Europe that the E.U. is indeed working as a team to fix its economic malaise. One large concern was that European governments would be responsible for their banks' debt, not anymore; at least that is the story as of now. The European Financial Stability Fund and the European Stability Mechanism will provide funding to troubled banks directly, not through their respective governments. This news had European markets up significantly Friday, and that euphoria spilled over here at home, in Wall Street. The problem, however, was that main street is not sharing the euphoric, as consumer sentiment took a turn for the worse this month.

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One very important reason to be discouraged Friday was that consumer sentiment data failed to meet expectations and fell to the lowest level so far this year. The University of Michigan Consumer Sentiment June final result landed at 73.2, which was lower than the Street's expectation of 74.1 and lower than the preliminary reading that was also 74.1. Consumer sentiment has declined from the 79.3 reached in the prior month and has put an end to a rather encouraging trend that had been developing for the prior nine months. Up until last month, it appeared that consumers were hanging on to their positive sentiment as they continued sensing that the employment backdrop was improving and that wage prospects were get better, not anymore. The data has been just too difficult to ignore, and after four straight months of slowing jobs growth and wage gains below inflation rates, coupled with continuing news flow about the European debt crisis, consumers are now losing hope, raising the risk that consumer spending will stagnate and throw the economy into a tail spin.

Of particular significance was that the most pessimistic views came from households making over $75,000 per year. These households viewed both the general economy and their own finances much less favorable than those making under $75,000. Percentage wise, those in the upper end of the income spectrum that expect their financial status to improve declined from 37 to 24 percent. It is apparent that the drop in gasoline prices had a more significant impact on lower income household than it did on those making more; as such, lower income households were not as pessimistic. The concern, however, is that the increasing pessimism of those at the higher income levels will have a sharp negative impact in consumption, as it is this segment that represents the largest share of spending. The fact is that upper households are increasingly more discontent with the current economic policies as well as with the slow responsiveness of the federal government.

In essence, with the increasing overall pessimism coming from the higher income earners and with the increasing number of consumers reporting more job losses than gains for the first time this year, consumer spending is becoming increasingly at risk of coming to a halt. Given the 70 percent of the economy comes from consumer spending and given that that the other segments are stalled or in decline, the U.S. economy is at an even higher risk of demonstrating virtually no growth this year.