Tags: US | Economy

Confidence Falls Even as Corporate Profits Rise

Tuesday, 27 July 2010 03:35 PM EDT

The disconnect between Wall Street and Main Street is growing.

Americans' confidence in the economy faded further in July, according to a monthly survey released Tuesday, amid job worries and skimpy wage growth. That's at odds with Wall Street's recent rally fueled by upbeat earnings reports from big businesses such as chemical maker DuPont Co. and equipment maker Caterpillar Inc. That's because the pumped-up profits are being fueled by cost cuts like layoffs and overseas sales. In fact, big companies have shown few signs they're ready to hire.

The Consumer Confidence Index came in at 51.0 in July, a steeper-than-expected decline from the revised 54.3 in June, according to a survey the Conference Board. The decline follows last month's decline of nearly 10 points, from 62.7 in May, and is the lowest point since February. It takes a reading of 90 to indicate a healthy economy — a level not seen since the recession began in December 2007.

"Consumers have a much different view of the economy than the stock market does, and their views matter more to the economy," said Mark Vitner, an economist at Wells Fargo. The index "tells me the economy is heading for slower growth in the second half. We have low expectations for back-to-school."

Joel Naroff, president of Naroff Economic Advisors, agreed, noting that the fatter profits have shown that companies have been able to squeeze out higher productivity from workers, but that also means that "households are not benefiting."

The profit picture is "good news for Wall Street, but not good for workers," he added.

The survey was taken July 1-21, beginning just before the Standard & Poor's 500 index hit a nine-month low of 1,022.58 on July 2. It had risen 4.5 percent by July 21 and has since climbed an additional 4 percent as upbeat earnings reports from key manufacturers have made investors more convinced that the economic recovery isn't stalling as much as they had originally thought.

The Dow Jones industrial average fell 3 points on Tuesday, ending three days of big gains, as investors digested the confidence data as well as a slowdown in regional manufacturing reported by the Richmond Federal Reserve. Stocks rose moderately at the open because of strong earnings from chemical maker DuPont Co. and European banks UBS and Deutsche Bank.

DuPont, which has announced thousands of job cuts over the past year, reported that second-quarter income nearly tripled, as revenue surged in most of its businesses. The results were led by revenue gains in the Asia Pacific region. DuPont didn't announce any hiring plans.

A rapid, sustainable recovery can't happen without the American consumer. And the second straight month of declining confidence following three months of increases is worrisome, economists say.

Economists watch confidence closely because consumer spending accounts for about 70 percent of U.S. economic activity and is critical to a strong rebound.

Both components of the index declined. They measure how people feel about the economy now, and their expectations for the next six months.

The index — which measures how Americans feel about business conditions, the job market and the next six months — had been recovering fitfully since hitting an all-time low of 25.3 in February 2009. The index typically falls before the economy slows down, and on the way out of a recession, the expectations component, which accounts for 60 percent of index, rises sharply, said Lynn Franco, director of The Conference Board Consumer Research Center.

"It's all about jobs. That's still the primary source of income," Franco said. "Until we see the pace of job growth pick up and consumers are confident that this is sustainable, we are not likely to see a significant pickup in confidence."

The Conference Board survey, based on a random survey mailed to 5,000 households, showed that consumers' assessment of the job market was more negative than the month before. Those claiming that jobs are "hard to get" increased to 45.8 from 43.5 percent, while those saying jobs are "plentiful" remained unchanged at 4.3 percent.

Michelle Banks, 38, a teacher from Bloomfield, N.J., said she's more worried about job security than she was last year because of rampant state budget cuts. So she started saving money for back-to-school items for her 5-year-old son in January. She plans to spend $200, evenly divided between school supplies and clothing.

"I'm buying clothes that will last, not fall apart," she said.

Economists say the index's expectations component tends to track stock market movements, but Vitner noted that the market's big plunge in May has made such an imprint on consumers that the recent rebound hasn't registered.

Retailers had a surprisingly solid start to the year, but business has been slowing since April. With unemployment stuck near 10 percent, Americans are expected to remain skittish through the back-to-school and Christmas season.

Concerns are also rising about the housing market. While the S&P/Case-Shiller 20-city home price index released Tuesday showed a 1.3 percent rise in May from April, the home buyer's tax credit, which expired April 30, helped pull more buyers into the market. In fact, the report warned that the recent gains in home prices are not likely to last.

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The disconnect between Wall Street and Main Street is growing.Americans' confidence in the economy faded further in July, according to a monthly survey released Tuesday, amid job worries and skimpy wage growth. That's at odds with Wall Street's recent rally fueled by upbeat...
Tuesday, 27 July 2010 03:35 PM
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