US: Consumer Sentiment

Fri Aug 28 09:00:00 CDT 2015

Consensus Consensus Range Actual Previous
Sentiment Index - Level 93.3 92.7 to 95.0 91.9 92.9

An early reading on the effect of global volatility is downbeat as the consumer sentiment index came in well below expectations, at 91.9 for the final August reading. The mid-month reading was 92.9 which roughly implies a pace near 91.0 over the last two weeks which is the softest since May.

But the effect isn't enormous as the current conditions component, where the immediate impact of market events is most felt, slipped only 2 points over the last two weeks to 105.1. This is a respectable level but is slightly lower than the 107.2 for July and points to a slight slowing in consumer activity for August.

The expectations component is only marginally lower, at 83.4 for final August for a 4 tenths dip from mid-month and a 7 tenths dip from July. Expectations for inflation are flat, at 2.8 percent for the 1-year outlook, which is unchanged from both mid-month and July, and at 2.7 percent for the 5-year which is unchanged from mid-month and down 1 tenth from July.

This report is probably a wash for the September FOMC. The doves can argue that market events in China are hurting consumer confidence but the hawks can argue that the effect isn't that great.

Market Consensus Before Announcement
The final reading for this month's consumer sentiment index will include the psychological impact of China's devaluation and subsequent volatility in the financial markets. This index has been coming off highs early in the year but, boosted by strength in the jobs market, is still solid. Despite the global volatility, forecasters see a slight uptick for the final August reading, to 93.3 in what would be a 4 tenths gain from the flash reading.

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.