US: Consumer Sentiment

Fri Jan 16 09:00:00 CST 2015

Consensus Consensus Range Actual Previous
Sentiment Index - Level 94.0 92.0 to 98.0 98.2 93.6

Retail sales and home sales may be soft but not consumer sentiment which is literally surging, up 4.6 points in the mid-January reading to 98.2 for the highest level since January 2004. The expectations component, up 5.0 points to 91.6, is also at its highest level since January 2004 and reflects confidence in the outlook for jobs and income. The current conditions component, up 3.5 points to 108.3, is at its highest level since January 2007. This gain points to ongoing acceleration in consumer activity.

Part of the reason for the surge is the steep drop underway in gasoline prices. One-year inflation expectations are down an exceptionally sharp 4 tenths to 2.4 percent. Five-year expectations are also at 2.4 percent, unchanged from December.

Gains underway in the labor market are giving consumers a new confidence that sooner or later will be reflected in consumer spending. Markets are showing no significant initial reaction to today's report.

Market Consensus Before Announcement
The University of Michigan's consumer sentiment index held steady for final December at a very high level of 93.6, little changed from 93.8 at mid-month and far above November's final reading of 88.8. The current conditions component, which offers an indication on month-to-month change in consumer activity, slipped 9 tenths from the mid-month reading to a still very strong 104.8 which is 2.1 points above final November. The expectations component, which offers an indication on confidence in the outlook for jobs and income, was up 3 tenths from mid-month and up a very strong 6.5 points from final November.

The University of Michigan's Consumer Survey Center questions 500 households each month on their financial conditions and attitudes about the economy. Consumer sentiment is directly related to the strength of consumer spending. Consumer confidence and consumer sentiment are two ways of talking about consumer attitudes. Among economic reports, consumer sentiment refers to the Michigan survey while consumer confidence refers to The Conference Board's survey. Preliminary estimates for a month are released at mid-month. Final estimates for a month are released near the end of the month.

The pattern in consumer attitudes and spending is often the foremost influence on stock and bond markets. For stocks, strong economic growth translates to healthy corporate profits and higher stock prices. For bonds, the focus is whether economic growth goes overboard and leads to inflation. Ideally, the economy walks that fine line between strong growth and excessive (inflationary) growth. This balance was achieved through much of the nineties. For this reason alone, investors in the stock and bond markets enjoyed huge gains during the bull market of the 1990s. Consumer confidence did shift down in tandem with the equity market between 2000 and 2002 and then recovered in 2003 and 2004. More recently, the credit crunch and surge in gasoline prices led confidence downward in 2007. Despite a drop in gasoline prices, 2008 saw sentiment near record lows due to recession, a precipitous fall in stock prices, and fragile credit markets. However, consumer sentiment helped to confirm the easing of recession during 2009 as this index slowly rose from earlier lows. One should be aware that this report is released to private subscribers several minutes prior to release to the media. This may account for occasional market activity just prior to public release.

Consumer spending accounts for more than two-thirds of the economy, so the markets are always dying to know what consumers are up to and how they might behave in the near future. The more confident consumers are about the economy and their own personal finances, the more likely they are to spend. With this in mind, it's easy to see how this index of consumer attitudes gives insight to the direction of the economy. Just note that changes in consumer confidence and retail sales don't move in tandem month by month.