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Consumer Sentiment Drops in June

Economy: Spending falls in May for the first time in six months. But analysts say the recovery is still on track.

June 29, 2002|From Reuters

U.S. consumer sentiment suffered its biggest one-month drop since the Sept. 11 attacks in June as reports of job losses, battered stock markets and news of corporate shenanigans all weighed on Americans.

Government data released Friday showed personal spending fell in May for the first time in six months, but the latest evidence from auto showrooms and retail stores suggests shopping is not going out of fashion. That's crucial because consumer spending makes up two-thirds of the U.S. economy.

A separate report showed the pace of manufacturing activity in the Chicago area slowed in June but still registered its fifth straight month of solid growth.

Taken together, analysts said, resilient consumers and an improving manufacturing sector suggested that worries of a double-dip recession were overdone.

"The expansion remains on track," said Paul Kasriel, chief U.S. economist at Northern Trust in Chicago.

The University of Michigan's final June consumer sentiment index fell to 92.4 from 96.9 in May, but that was up from a preliminary reading of 90.8 released two weeks ago. Economists had expected the index to be unchanged from its mid-month reading.

June was a rough month for consumer confidence amid charges of corporate insider trading and news that shocked the markets: telecommunications company WorldCom Inc. said it had improperly accounted for $3.9 billion in expenses.

Warnings of potential terrorist attacks on the United States during the Fourth of July holiday and a 7.4% slide in the Standard & Poor's 500 index during the month have done little to boost spirits.

The conditions index, which tracks consumers' views about their present financial situation, fell to 99.5 in June from 103.5 in May but was up from a preliminary 97.9.

Analysts said the Michigan expectations index, which measures attitudes on the 12-month outlook and fell to 87.9 from 92.7 a month earlier, still stood at levels consistent with solid spending growth in coming months.

The Commerce Department reported that personal spending fell 0.1% in May, primarily because of weaker auto sales, while personal income rose 0.3%, a sixth straight month of gains.

Declining spending and rising incomes helped fortify people's finances, boosting the saving rate to 3.1% of disposable income in May from 2.8% in April.

But despite the consumer pullback in May, analysts said anecdotal evidence and weekly reports on chain store sales this month have indicated that shop-happy Americans have not disappointed in June.

Indeed, even as May auto sales stumbled, Ford Motor Co. raised its third-quarter North American production estimate by 16% from a year earlier.

Americans also have taken advantage of low mortgage rates and turned to homes as a new source of investment, supporting demand for big-ticket items such as refrigerators. Reports this week showed record demand for homes.

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