Sky-high gas prices seem to have taken their toll on consumer confidence according to a new report, evidence that surging fuel costs could be dampening Americans' increasingly optimistic outlook for the economy.
Overall consumer sentiment dipped unexpectedly, shy of economists' forecasts, according to the Thomson Reuters/University of Michigan's consumer sentiment index released Friday. Higher prices at the pump pushed up Americans' inflation expectations for the next year.
Gas prices are up 17 percent nationally since December and many economists expect those prices to continue their upward march, putting more strain on consumers' wallets. Still, sustained labor market gains could go a long way in offsetting gloom over gas prices.
"You need to keep in perspective that over the last six months improving labor market conditions as well as improving stock market performance and declining stock market volatility has had a positive effect on sentiment," says Christian Andreach, managing director of Rochester, N.Y.-based asset management firm Manning & Napier. "We've seen sentiment rise about 23 points over the last six months or so, but I think a modest pull back tied to what we all see at the pump is not entirely unexpected."
But if gas prices hit the meteoric highs some economists are predicting, all bets are off. Higher fuel prices means Americans have less cash to spend on eating out or buying the latest iPad, putting a big dent in the consumer spending that fuels 70 percent of the U.S. economy.
"The data indicate that $4 gasoline has lost its shock value," survey director Richard Curtin said in a statement. "If gasoline prices approach $5 per gallon, however, a widespread and substantial impact is likely."
Still, employment growth remains the most important factor for the nation's economic outlook. A bad report sends ripple effects radiating throughout the economy and financial markets. A good report bolsters confidence and encourages further growth.
"The more relevant indicator is to watch for improving labor market conditions, which we have seen over the past few months," Andreach says. "Absent those improvements you would be a little more concerned, but for now [the drop in consumer sentiment] isn't something that overly concerns us."