US consumers turned surprisingly cautious in December despite a raft of news about an improving economy, creating doubt whether the holiday shopping season would be naughty or nice for retailers.
The University of Michigan's preliminary reading of consumer sentiment dropped to 89.6 in December from November's final reading of 93.7, leaving financial markets waiting for a result of 96.0 flat footed.
"This result is hard to believe," Stephen Stanley, senior economist at RBS Greenwich Capital in Greenwich, Connecticut, said in a research note.
Stanley and other economists said the Michigan index was out of sync with other gauges of consumer confidence and would likely rebound in coming months.
While cautioning against reading too much into the report, the prospect of declining consumer confidence at this stage of the recovery is troubling because consumer spending leads to business spending, which leads to more jobs. In the last four months, the US economy has finally started to produce jobs.
"It's only one month's figure, but households as well as businesses have generally taken a very cautious line in this recovery," said 4Cast research director Alan Ruskin.
"There's a general degree of skepticism out there that some of the strength we've seen in growth is generated by fiscal stimulus and that's going to wear off. And what then?"
The dip in consumer sentiment raised some concerns about the all-important holiday shopping season, although economists warn that confidence does not necessarily translate into actual spending.
Consumers won't have to contend with higher prices for some time to come though, as a separate government report showed wholesale price pressures remain muted. That suggests inflation will remain tame, as the Federal Reserve has forecast.
Wholesale prices unexpectedly dropped 0.3 per cent in November as food, energy and automotive costs all tumbled. It was the first decline in six months, and confounded forecasts for a 0.1 per cent rise.
Even when food and energy costs are stripped out, the core index of producer prices fell 0.1 per cent.
The report on wholesale prices provided some support for the Federal Reserve's comments in the minutes of its October 28 meeting, that inflation could remain very low for "a year or two."
The Fed's comments helped to push back expectations for when the central bank might need to raise interest rates, after the Fed kept it benchmark interest rate at 1.0 per cent in a meeting last week.
"The decline by the PPI overall and the dip by the core PPI is very much consistent with the general absence of inflation risks," said John Lonski, chief economist at Moody's Investors Service.