U.S. consumer sentiment drops to year’s low

Confidence among U.S. consumers unexpectedly declined in July to the lowest level this year as Americans grew more pessimistic about their finances.

The Thomson Reuters/University of Michigan index of consumer sentiment dropped to 72 this month from June’s 73.2 reading. The gauge was projected to rise to 73.5, according to a median forecast of 69 economists surveyed by Bloomberg News.

The weakest quarter of hiring by companies in two years along with stock market volatility tied to Europe’s debt crisis threaten to hold back the household spending that accounts for about 70% of the economy.

“The labor market has been pretty slow to recover, house prices are still low and there’s a lot of nervousness about what’s going on in Europe” and Washington, said Michael Hanson, a senior U.S. economist at Bank of America in New York, who correctly forecast the July reading. “The economy looks like it’s slowing.”

Estimates for the Michigan confidence measure ranged from 71.5 to 76.5, according to the Bloomberg survey. The index averaged 64.2 during the last recession and 89 in the five years before the 18-month economic slump that ended in June 2009.

Stocks climbed, erasing the week’s loss for the Standard & Poor’s 500 Index on speculation China will boost stimulus measures and as JPMorgan Chase & Co. rallied after reporting earnings. The S&P 500 gained 1.7% to 1,356.78 at the 4 p.m. close in New York.

The University of Michigan’s measure of confidence mirrors the Bloomberg Consumer Comfort Index, which stagnated last week and has fallen since the end of June.

The Michigan survey’s index of consumer expectations for six months from now, which more closely projects the direction of consumer spending, decreased to 64.8, also the lowest this year, from 67.8.

One in 10 consumers surveyed said they expected their inflation-adjusted incomes would increase in the next 12 months, according to economists at Barclays Plc in New York.

The Michigan gauge of current conditions, which asks Americans whether they’re better off than they were a year ago and if they think it’s a good time to buy big-ticket items like cars, rose to 83.2 in July from 81.5.

Employment growth has waned relative to its pace earlier this year. Private payrolls, which exclude government agencies, increased by 84,000 in June, capping the worst quarter for corporate employment since the first quarter of 2010. The jobless rate held at 8.2%.

Consumers in today’s confidence report said they expect an inflation rate of 2.8 percent over the next 12 months, the lowest since October 2010 and down from 3.1 percent in June.

Over the next five years, the figures tracked by Fed policy makers, Americans also expected a 2.8% rate of inflation this month, matching the figure in June.

Another report today showed prices paid to producers unexpectedly rose in June as food costs picked up. The producer price index climbed 0.1% after a 1% decrease a month earlier. The gauge minus energy and food rose 0.2%, as forecast. Economists surveyed by Bloomberg projected a 0.4% drop in wholesale prices, according to the survey median.

The Federal Reserve has signaled that a further economic slowdown would bring growing support among policy makers for additional steps to spur the three-year expansion, according to minutes of the June 19-20 meeting released this week in Washington.

A few members of the Federal Open Market Committee said the Fed should ease policy to move the economy toward its targets for full employment and stable prices. Several others said more action could be warranted if growth slows, risks intensified or inflation seemed likely to fall “persistently” below their goal.

Cheaper energy costs are providing some respite for Americans. The price of a gallon of gasoline was $3.39 as of yesterday, according to AAA, the biggest U.S. auto group. While that’s down from a high this year of $3.94 in April, fuel prices are up about 5 cents higher since the end of June.

Elsewhere, China’s growth slowed for a sixth straight quarter. Gross domestic product expanded 7.6% in the second quarter from the same three months last year, the weakest in three years, the National Bureau of Statistics said today in Beijing.

In Europe, Spanish lenders’ net borrowings from the European Central Bank jumped to a record 337 billion euros ($411 billion) in June as the European bailout agreement failed to ease their access to funding.