Strategy

Consumers Confident, Economy Sluggish

Economists were surprised by a big pullback in consumer spending, despite upbeat news from consumer-confidence surveys.
Ed ZwirnAugust 2, 2004

Consumer confidence is rising, according to two reports issued last week, but a slowdown in the shopping habits of Americans is dragging on the performance of the U.S. economy, according to government data released Friday.

The University of Michigan’s consumer-confidence index inched up from 95.6 in June to 96.7 in July, according to Reuters. That news dovetailed with an announcement earlier last week from the Conference Board, which said that its own consumer-confidence index posted further gains in July atop sharp increases the prior month. That index is now at its highest level since June 2002.

Yet Friday, the Department of Commerce reported that gross domestic product climbed at a modest 3 percent annual pace in the second quarter of 2004. In the first quarter, GDP had risen 4.5 percent — revised upward from the previously reported 3.9 percent — and Wall Street economists had looked for GDP to slow less sharply, to 3.6 percent, according to Reuters.

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Economists were also surprised by a big pullback in consumer spending, the wire service added. Spending rose 1 percent in the second quarter, far less than the 4.1 percent for the first quarter and the slowest increase since 2001, when the economy was in recession.

Friday’s Commerce Department data also showed that inflation rose at a relatively high 3.3 percent in the second quarter, matching the first quarter’s pace. Core inflation, which excludes the volatile food and energy sectors, rose 1.8 percent, a slowdown from the first quarter’s 2.1 percent increase.

U.S. oil prices hit record highs on Friday, reported Reuters, when U.S. light crude struck $43.34 a barrel, the highest in its 21-year history on the New York Mercantile Exchange. Prices began their most recent rise on Wednesday amid speculation that Russian oil giant Yukos might face a sales ban while courts try to enforce a multibillion-dollar tax debt.

Russia’s justice ministry later ruled that Yukos could keep pumping, added the wire service, but markets remain edgy about prospects for the world’s second-largest oil exporter. OPEC is pumping at more than 95 percent of capacity, its highest level in a quarter-century, leaving little room to cover any shortfall elsewhere, Reuters observed.

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