U.S. Michigan Consumer Sentiment Index Fell to 56.3

Confidence among U.S. consumers fell in February, weighed down by job losses, declining stock prices and plunging home values.

The Reuters/University of Michigan final index of consumer sentiment fell for the first time in three months to 56.3 from 61.2 in January. The gauge reached a 28-year low of 55.3 in November.

The loss of 3.6 million jobs and erosion of households’ net worth are crippling the consumer spending that makes up about 70 percent of the economy. President Barack Obama is counting on a $787 billion stimulus plan to arrest what may be the worst recession of the postwar era, and a separate program to keep people struggling with mortgage costs from losing their homes.

“We continue to shed jobs and, as long as people fear the next job lost will be theirs, they’re not going to spend,” Maxwell Clarke, chief U.S. economist at IDEAglobal in New York, said before the report. “People realize that just because it’s a new year doesn’t mean it’s a new situation.”

Economists forecast the sentiment gauge would drop to 56, according to the median of 52 economists surveyed by Bloomberg News. Estimates ranged from 51 to 61.2.

The group’s preliminary report earlier this month showed a sentiment reading of 56.2.

A Commerce Department report earlier today showed the economy shrank at a 6.2 percent pace in the fourth quarter, revised from the 3.8 percent rate estimated last month. That’s the biggest contraction since 1982.

Consumer Spending

Consumer spending contracted at a 4.3 percent pace in the last three months of 2008, the fastest in almost three decades, the Commerce report showed.

Reluctance to spend “helps perpetuate the feedback loop the economy is in, causing retailers and producers to themselves pull back further,” Seamus Smyth, an economist at Goldman Sachs Group Inc. in New York, said in a note to clients earlier this week. “This then leads to more job cuts, which only reinforces the consumer retrenchment.”

The University of Michigan’s index of consumer expectations six months from now, which more closely predicts the direction of consumer spending, fell to 50.5, from 57.8 in January.

A measure of current conditions, which reflects Americans’ perceptions of their financial situation and whether it’s a good time to buy expensive items such as cars, fell to 65.5 from 66.5.

Inflation Expectations

Consumers in today’s report projected an inflation rate of 1.9 percent over the next 12 months, compared with 2.2 percent in the January survey.

Over the next five years, Americans expected a 3.1 percent rate of inflation, compared with the 2.9 percent forecast last month. These figures are tracked by Federal Reserve policy makers.

Economists in a monthly survey by Bloomberg News this month said consumer spending may fall at a 2.7 percent pace during the first three months of the year and 0.9 percent from April through June after declining in the last two quarters of 2008. That would be the first time on record that purchases have dropped for more than three consecutive quarters.

Whirlpool Corp., the world’s biggest appliance maker, said Feb. 9 that its profit will probably fall for a second straight year as the recession and a plunge in home construction stifle demand. Appliance sales in the U.S. will decline 10 percent this year, Chief Executive Officer Jeffrey Fettig said on a conference call.

‘Severity and Scope’

“The severity and scope of the global economic downturn has significantly increased over the last several months and had a significant impact on consumer demand in all parts of the world,” Fettig said in a statement before the call.

The Conference Board said earlier this week that its measure of consumer confidence plunged to a record low this month. Americans surveyed by the New York-based group said jobs were harder to get and viewed their financial well-being in future months with more pessimism.

The Labor Department is scheduled to release its February employment report on March 6. The figures may show job cuts exceeded half a million for a fourth consecutive month, according to a Bloomberg survey, and that the unemployment rate climbed to 7.9 percent, the highest level since 1984.

Obama’s stimulus package includes tax cuts for most U.S. families and allocates billions of dollars toward cities to rebuild crumbling infrastructure while creating jobs. Last week, he also introduced a plan to help as many as 9 million people restructure their mortgages to avoid foreclosures.