Consumer Sentiment Very Disappointing
Likely real GDP decline likely for second quarter.
Consistent with my view of declining personal income and personal consumption expenditures in June, the Reuters-University of Michigan preliminary July Index of Consumer Sentiment reported this morning fell from 70.8 (the final June reading) to 64.8. This is meaningfully weaker than market expectations of an increase to 71.5.
The preliminary July reading of 64.8 is the worst since February, but it's still better than the 61.2 level of July 2008, and is also well above the cyclical low of 55.3 reached in November 2008.
The weakness in consumer sentiment was broadly based, as the current conditions component receded to 70.4 from 73.2 in June. More troublesome was the steeper decline in the expectations component, which dropped to 60.9 -- falling 8.3 points from June's 69.2. This is real weakness, as the expectations component in dropping to 60.9 was at its lowest level since the 53.5 reading in March.
Today's consumer sentiment number reinforces my expectation of a decline in real personal consumption expenditures (PCE) in the second-quarter Gross Domestic Product (GDP) detail reported by the Bureau of Economic Analysis on July 31. I believe real PCE will drop 1.5% annualized in the second quarter -- a sharp reversal from the 1.4% annualized advance in the first quarter.
In contrast, real net exports will contribute positively to second-quarter real GDP. Besides the consumer, the big drag on second-quarter real GDP will be the business sector accelerating the pace of inventory liquidation. This acceleration leads me to forecast a real GDP decline at an annual rate of 2.5% -- a larger decline than market consensus expectations.
In my view, this liquidation and the Obama stimulus will give us an economic trough in August and an upturn in industrial production in September.
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