Consumer attitudes toward the U.S. economy and their place in it track many factors, but the behavior of prices and the jobs picture have oversized influence.  Consumer attitudes help guide changes in their spending, and consumer spending accounts for 70% of GDP.  The continued slump in housing prices, the loss of high paying jobs, and incomes that fall short of prices leave consumers feeling uneasy. 

The May 2014 unemployment rate was 6.3%, down from a peak of 10% in October 2009.  May 2014 also signaled that new jobs during the recovery had equaled jobs lost during the recession.  Offsetting the relief from high recession unemployment, the participation rate stands depressed at 62.8%, the lowest since February 1978.  Some have either retired or given up looking for a job.

Over the 12 months ending April 2014, the price index for “all items” increased by 2%, food by 1.9%, energy 3.3%, medical care 2.7% and shelter by 2.8%.  Inflation is not high, but the price increases are noticeable, especially when they outstrip consumer’s median average weekly earnings which increased by just $4 (i.e. 1.3%) over the year ending 1st quarter of 2014.  

An encouraging housing price increase (annual rate of 12.2% in the year ending February 2014) buoyed spirits for some consumers, but the improved prices were unevenly spread.  The housing market remains far below the peak in 2006, and many homeowners still live under the dark cloud of likely home values that are below mortgage debt.  This precludes any wealth effect that used to propel spending.

Consumer temptations to spend more are also restrained by a pay packet that buys less than it did a year ago.  But consumers have the option of spending borrowed funds, and that’s exactly what they did.  Consumer credit outstanding increased at a rapid annual pace of 10.2% in April 2014, possibly leading to pangs of remorse reflected in May’s consumer sentiment.

The University of Michigan Consumer Sentiment index was 81.9 in May, 84.1 in April, and 80 in March 2014.  The current consumer sentiment “puts us 12.6 points above the average recession mindset and 5.5 points below the non-recession average.”  Consumers’ outlook is tentative, a little on the pessimistic side.

Alan Daley is a retired businessman who writes for The American Consumer Institute Center for Citizen Research