July 28, 2010 in Nation/World

Corporations’ profits rise, but consumers still wary

Anne D’Innocenzio Associated Press
 
Tags:economy
The index

The numbers: The Consumer Confidence Index slipped to 50.4 in July, from June’s 54.3. An index of 90 is considered healthy.

• The disconnect: The index fell amid Wall Street’s rally. But earnings have been fueled by cost-cutting and sales overseas.

NEW YORK – 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 50.4 in July, a steeper-than-expected decline from the revised 54.3 in June, according to a survey by 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 rose 12 points Tuesday, although broader stock measures slipped, after 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.

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.”

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