What's got American consumers spooked?

John W. Schoen • Profile • E-mail

American consumers — whose spending decisions account for 70 percent of U.S. economic activity — are getting nervous.

Buffeted by a spike in gas prices, outsized daily gyrations in the stock market, and rising foreclosures in a deteriorating housing market, consumer confidence dropped further than expected in March.

A widely watched index used to measure consumers' mood fell from 111.2 in February to 107.2 in March, according the Conference Board, a New York-based business research group. Analysts had expected a reading of 109. The March index was the lowest since November 2006 when the reading was 105.3.

The survey seemed to show that, on average, consumers aren’t about to pull back on their spending just yet. The survey’s “Present Situation Index” — which tracks attitudes about current economic conditions — bumped up a bit. But the “Expectations Index” — which asks about consumers’ outlook for the next six months — dropped from 86.9 from 93.8.

What's got American consumers spooked? Headlines about gas prices, stock market turbulence and the housing market’s descent have clearly left a strong impression on shoppers' psyches. But the impact of these three developments is having a very different impact on consumers’ ability to keep spending.

Gas price puzzle
With the Memorial Day weekend still nine weeks away, gas prices climbed for the eighth straight week to an average of $2.61 a gallon for regular, according to this week's government data. That’s 11.2 cents higher than a year ago.

As one of the few consumer products priced daily in large type, visible on every trip to the mall, gas prices have an outsized impact on consumer sentiment. But as a percentage of the average household budget, gasoline accounts for only about a nickel of every dollar spent. So even an 11-cent increase should not have a huge impact on overall spending.

And though memories are fresh of a  bigger surge in pump prices in 2005 and 2006 —caused by strong demand and major supply interruptions — the latest price run-up may be short-lived.

After a series of seasonal routine shut-downs for maintenance — and a couple of unexpected refinery fires — production began rising again last week.

Higher pump prices should also pull more imported gas into U.S. markets. So, barring major disruptions like a bad hurricane season, prices are unlikely to rise to last year's peak levels, according to the Department of Energy.

Stock market madness
With something like half of all Americans invested in the stock market — either directly or through mutual funds and 401(k) plans — the stock market’s March Madness also has galvanized consumers’ attention. After a steady run-up that began in July, market averages posted a couple of stunning one-day declines that attracted big headlines and created public angst.

But the big point drops that made headlines overstated the damage. Even with the recent gyrations, stocks are trading 16 percent higher than their lows of last June, based on the S&P 500 index — not a bad 10-month run.

Still, the market’s volatility remains high, and investor optimism fell for the second month in a row in March — according to the UBS/Gallup Index of Investor Optimism.  And there may be more stomach-churning drops until the next round of corporate earnings begins coming in next month.

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