US: Consumer Sentiment

January 27, 2017 09:00 CST

Consensus Consensus Range Actual Previous
Sentiment Index - Level 98.2 98.0 to 99.0 98.5 98.1

Consumer sentiment remains very strong, at 98.5 in January and at the cycle highs where it's been since the November election. Prospects for future income are the highest in a decade, though the sample is split between optimism among Republicans offsetting pessimism among Democrats. One fifth of the sample says it's a good idea to borrow in advance of possible rate increases, a 20-year high for this reading. This rise in rate expectations is reflected in inflation expectations which are up a very sharp 4 tenths this month for the 1-year outlook and 3 tenths for the 5-year outlook, both at 2.6 percent. A not-so-positive in the report is a 6 tenths decline to 111.3 in the current conditions component, a dip that does not point to increases in consumer spending. In fact, a point to remember is that the post-election spike in confidence, both consumer in confidence and business confidence, did not result in great strength for the fourth-quarter economy.

Market Consensus Before Announcement
Consumer sentiment held at post-election highs in the preliminary reading for January, at 98.1 and little changed from 98.2 in December. The preliminary report noted that partisanship is extreme right now with 44 percent of the sample citing the importance of government policies (whether positive or negative). The cycle average for this reference is 20 percent. Forecasters see the final January index coming in at 98.2.

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.