Bloomberg – Jun 28, 2012

Claims for unemployment insurance payments decreased by 6,000 to 386,000 in the week ended June 23, according to Labor Department figures issued today in Washington. The revised 392,000 claims in the previous week matched the most this year. The Bloomberg Consumer Comfort Index also showed growing apprehension over the state of the economy.

Concern about the European debt crisis and the so-called fiscal cliff that the U.S. faces at the end of this year may prompt employers to keep payrolls lean, limiting the hiring needed to boost consumer spending. A 57-cent per gallon decrease in gasoline prices since early April is providing some relief, helping offset concern the job market is weakening by allowing employed Americans to stretch their paychecks.

“We’re going to see consumers be cautious over the next few months,” said Ryan Sweet, a senior economist at Moody’s Analytics Inc. in West Chester, Pennsylvania, who projected 385,000 claims. “Spending is going to be soft, and I think it’s because of the job market. The labor market is not creating the wage income necessary.”

Stocks pared losses in the final hour of trading amid speculation European leaders were nearing agreement on ways to halt contagion from the debt crisis. The Standard & Poor’s 500 Index dropped 0.2 percent to 1,329.04 at the 4 p.m. close in New York. Treasury securities rose, sending the yield on the benchmark 10-year note down to 1.58 percent from 1.62 percent late yesterday.

Europe Slums

Elsewhere, economic confidence in the euro area slumped in June to the lowest since October 2009, adding to signs the economy fell back into a recession, and German unemployment increased more than economists forecast.

The U.S. economy, the world’s largest, expanded 1.9 percent in the first quarter, the same as previously estimated, reflecting a gain in consumer spending that now shows signs of cooling, according to data from the Commerce Department also issued today. It grew at a 3 percent pace in the last three months of 2011.

The Bloomberg Consumer Comfort Index rose to minus 36.1 in the week ended June 24 from minus 37.9 in the previous period. The gauge of household finances was positive for the first time since April, while sentiment toward the state of the economy dropped to the lowest level since February.

The report also showed confidence among higher-income households turned negative for the first time in three months as Europe's debt crisis hurts stock prices.

Less Spending

“The decline in confidence among households earning more than $100,000 per year likely reflects concerns about portfolio exposure to the crisis in Europe and the global economic slowdown,” said Joseph Brusuelas, a senior economist at Bloomberg LP in New York. Since the top 40 percent of income earners accounts for about 60 percent of consumer purchases,“even a modest pullback can have outsized effects on household spending and overall growth,” he said.

Shares of Coach, Inc. (COH), the largest U.S. luxury handbag maker, slumped 25 percent since the end of March through yesterday on investor concern that department-store sales are slowing.

“Obviously, the macro environment is uncertain and one of the things that we work hard to do is to navigate nimbly through that environment,” Chief Executive Officer Lew Frankfort told investors June 5 at a consumer conference.

Survey Results

The median forecast of 46 economists surveyed by Bloomberg projected jobless claims would come in at 385,000. Estimates ranged from 372,000 to 392,000.

The four-week moving average decreased to 386,750 from 387,500, which was the highest since the week ended Dec. 3.

Payrolls in May expanded by 69,000 workers, the slowest pace in a year, and have cooled each month since January. The jobless rate, which climbed to 8.2 percent in May, has been stuck above 8 percent since February 2009, the longest stretch of such elevated levels in the post-World War II era.

The employment report for June will be released on July 6.

“The problems in the job market that we saw in April and May have extended well into June,” said Sweet from Moody’s Analytics. “I think it’s going to be another disappointing report.”

Initial jobless claims reflect weekly firings and tend to fall as job growth — measured by the monthly non-farm payrolls report — accelerates.

Fed Action

Federal Reserve policy makers last week expanded a program to replace short-term bonds with longer-term debt in a bid to spur growth and trim a jobless rate that’s exceeded 8 percent for 40 consecutive months.

“There is no progress,” said Jeremy Lawson, a senior U.S. economist at BNP Paribas in New York. “There is clearly an underlying weakness that is troubling. The labor market is sputtering along, struggling to create jobs. The pace of consumer spending will slow in the second quarter.”

Retail sales fell 0.2 percent in May, matching the decrease in April, Commerce Department figures showed earlier this month. Sales excluding car dealerships slumped by the most in two years.

“The economy is really in a difficult spot at the moment,” said BNP Paribas’ Lawson. “With the labor market weak and the outlook for incomes weak, it’s hard to see how consumer spending can grow solidly.”

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