Confidence among American consumers unexpectedly slumped in March, which may signal a cooling in spending, the biggest part of the economy.
The Thomson Reuters/University of Michigan preliminary sentiment index for March fell to 71.8, the lowest level since December 2011, from 77.6 in February. The gauge was projected to increase to 78, according to the median estimate of 67 economists surveyed by Bloomberg.
Concern may be starting to mount over the damage that automatic across-the-board federal spending cuts will cause the economy and hiring. That may keep tempering optimism created by record stock prices, a hiring pickup, and a housing rebound that have so far helped propel bigger-than-forecast gains in spending.
“There was a little bit of a sequester-news related dip in confidence,” said Jim O’Sullivan, chief U.S. Economist at High Frequency Economics in Valhalla, New York. “Certainly on the minus side you have fiscal tightening, but on the plus side you’ve got the improving labor market.”
Forecasts ranged from 70 to 82.5, according to the Bloomberg survey. The index averaged 64.2 during the recession ended in June 2009, and 89 in the five years prior to the 18- month slump.
Stocks fell after the report. The Standard & Poor’s 500 Index dropped 0.4% to 1,557.21 at 10:14 a.m. in New York.
The Michigan survey’s current conditions index, which measures whether Americans think it’s a good time to make big investments and gauges consumers’ view of their personal finances, dropped to a preliminary 87.5 in March from 89 in February.
The preliminary index of expectations six months from now, which more closely projects the direction of consumer spending, slumped to 61.7 in March, the lowest since November 2011, from 70.2 the month before.
Consumers in today’s confidence report said they expect an inflation rate of 3.3% over the next 12 months, the same as in the prior two months. Over the next five years, Americans expected a 2.9% rate of inflation, down from February’s 3%.
Today’s report runs counter to other measures. Bloomberg’s Consumer Comfort Index has risen for six straight weeks to reach its highest level since April.
The outlook for confidence may bear on whether recent strength in spending can be sustained. Retail sales increased 1.1% in February, double the median forecast of economists surveyed by Bloomberg and the most in five months, Commerce Department figures showed this week.
A better job outlook may be help underpin spending even as confidence wanes. Payrolls rose by 236,000 workers in February and the number of people let go in January dropped to the lowest level in records going back 12 years, according to figures from the Labor Department. The jobless rate dropped to a four-year low of 7.7% last month from 7.9%.
Also, the housing market rebound is boosting consumers’ net worth. The S&P/Case-Shiller index of property values in 20 U.S. cities increased 6.8% in December from the same month in 2011, the biggest year-to-year gain since July 2006.
Nonetheless, consumers are contending with a higher payroll tax. The levy that funds Social Security reverted to its 2010 level of 6.2% from 4.2% as of January, and an American who earns $50,000 is taking home about $83 less a month as a result.
Households are also facing higher fuel costs. The price of a gallon of regular gasoline is hovering around $3.70 after hitting a low of $3.22 on Dec. 19, according to figures from AAA, the largest U.S. auto group. At the same time, the price has fallen from a recent high of $3.79 on Feb. 26.
David C. Novak, chief executive officer of Louisville, Kentucky-based Yum! Brands Inc., which operates and franchises restaurants such as Taco Bell, KFC and Pizza Hut, said their research indicates consumers remain uneasy.
“Nobody is really taking a victory lap,” Novak said in a Mar. 13 presentation. “People want to have confidence, but I don’t think they necessarily have it.”