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Americans fretting about the economy

Drop in index steepest since 2005 hurricanes

AP Graphic

NEW YORK — Consumer confidence soured in May, as Americans fretted about the overall economy's future and the job outlook.

The drop in a widely watched barometer of sentiment was the steepest since hurricanes pummeled the Gulf Coast last year, increasing worries about the health of consumer spending. Stocks plummeted on the news.

The New York-based Conference Board said Tuesday its consumer confidence index fell almost seven points to 103.2, down from a revised 109.8 in April. Still, May's reading was better than the 100.9 expected by analysts.

The decline stalled a rebound seen since November in the aftermath of last year's Gulf of Mexico hurricanes, which sent the index down 18 points in September. The exception was a dip in February when short-lived pessimism over the job market hurt consumer sentiment.

"Consumer confidence, which reached a four-year high in April, lost ground in May," said Lynn Franco, director of the New York-based Conference Board Consumer Research Center, in a statement. "Apprehension about the short-term outlook for the economy, the labor market and consumers' earning potential has driven the Expectations Index down to levels not seen since the aftermath of the hurricanes last summer."

Still, Franco said, consumers rate current conditions favorably.

The Expectations Index, which measures consumers' outlook over the next six months, fell to 83.7 in May from 92.3 in April. In fact, the proportion of consumers expecting their incomes to rise in the months ahead fell to the lowest level in three years, the survey reported. The Present Situation Index, which measures how shoppers feel now about economic conditions, slipped to 132.5 from 136.2.

Economists closely monitor consumer confidence because consumer spending accounts for two thirds of all U.S. economic activity.

Souring confidence, along with a jump in oil prices and a lackluster sales report from Wal-Mart Stores Inc., sent the Dow Jones industrial average plunging 184.18, or 1.63 percent, to 11,094.43, giving back all of the 180 points it gained in last week's runup. The Dow lost 214 points on May 11, its biggest one-day decline in three years.

Broader stock indicators retreated sharply. The Standard & Poor's 500 index dropped 20.32, or 1.59 percent, to 1,259.84; the Nasdaq composite index plunged 45.63, or 2.06 percent, to 2,164.74, falling back into negative territory for 2006.

The setback in confidence in May — while anticipated amid higher energy costs — is discouraging for retailers, which have seen sales slow during the month. In fact, Wal-Mart, the world's largest retailer, expects May sales at stores open at least a year to rise a modest 2.3 percent, at the low end of expectations. It cited high gasoline prices as a big factor. Wal-Mart and other major merchants are slated to report monthly results Thursday.

While shoppers have remained resilient in the face of higher gasoline prices, which have been hovering around $3 per gallon, the question is what will it take for consumers to dramatically cut their spending.

An AP-Ipsos poll in early May found 70 percent of Americans expect that increases in gas prices will cause financial hardship over the next six months — up from 51 percent a year earlier. The national telephone survey of 1,000 adults had a sampling error margin of plus or minus 3 percentage points.

So far, "there is a lot more worry about higher gasoline prices than there is action," said Mark Vitner, senior economist at Wachovia Securities in Charlotte, N.C. "Higher gasoline prices have certainly eaten into purchasing power, but spending is still barreling forward."

But Vitner noted that anxiety is building among consumers about what higher interest rates and higher energy costs will mean to the economy.

In a worrisome report issued last week by the Federal Reserve, core inflation, which excludes food and energy, rose 2.1 percent in April, the biggest gain in 13 months.

That's making economists nervous that high increases in oil prices are now expanding into other areas of the economy. And the Fed, which has been on an interest-hike campaign over the past two years, is being confronted with the challenge of keeping inflation in check without slowing the economy and hurting the housing market further.

Conflicting economic data is also making shoppers feel more uncertain about their future, said Karl Bjornson, retail strategist at Kurt Salmon Associates.

"We are in this conflicting, choppy water place, and consumers are beginning to be concerned," said Bjornson. He cited fluctuating gasoline prices and mixed messages about the housing market. Recent reports show the housing market has exhibited a split personality, with some hot markets in Florida, California and Arizona slowing down while some laggards are picking up momentum.

The Conference Board index was derived from responses received through May 23 to a survey mailed to 5,000 households in a consumer research panel. The figures released Tuesday include responses from at least 2,500 households.