Consumer Confidence Falls to 28-Yr. Low

MoneyNews
Saturday, May 17, 2008

NEW YORK -- U.S. consumer confidence tumbled to its lowest in 28 years this month, a survey showed Friday, as short-term inflation expectations reached the highest levels since the stagflationary early 1980s.

The news heightens the dilemma for the Federal Reserve, which has bet that slowing economic growth will tame inflation pressures. The report also showed that lower-income households were the focus of the downturn in sentiment.

The Reuters/University of Michigan Surveys of Consumers' preliminary index of confidence fell to 59.5 in May, the lowest since June 1980. In April it was at 62.6.

"Troubling all around, lower confidence and ongoing inflation worries," said Ian Lyngen, interest rate strategist at RBS Greenwich Capital in Greenwich, Connecticut.

Stocks fell on Wall Street and the dollar also lost further ground versus the euro after the surprisingly weak consumer sentiment reading.

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Government bonds, which benefit in times of economic deterioration, reversed early losses and turned higher.

The confidence index was well below economists' median expectation of a reading of 62.0, according to a Reuters poll.

"Consumer confidence continued to slip in early May due to surging food and fuel prices," the Surveys of Consumers statement said. "Record numbers of consumers viewed the economy in recession and saw little hope of recovery anytime soon."

One-year inflation expectations surged to 5.2 percent — the highest since February 1982 — from 4.8 percent in April.

Also worrying for policy-makers at the Federal Reserve, five-year inflation expectations hit the highest since August 1996, edging up to 3.3 percent from April's 3.2 percent.

The inflation measures challenge the Fed's view that soaring commodity prices have not yet led to an increase in long-term expectations for price growth.

The report fuels worries that the United States could be entering the early days of a period of stagflation like the late 1970s and early 1980s, characterized by a sluggish economy and accelerated price growth.

The index of consumer expectations came in at 51.7 in May, the lowest since October 1990, amid the runup to the first Gulf War. In April it was 53.3.

The Surveys of Consumers also said the data indicate that consumption growth is likely to be 1 percent in 2008, "with the pace weakening in late 2008 and early 2009."

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