US: Consumer Sentiment

Fri Oct 13 09:00:00 CDT 2017

Consensus Consensus Range Actual Previous
Sentiment Index - Level 95.4 93.5 to 95.8 101.1 95.1

Consumer sentiment is surging this month, to a 101.1 preliminary index for October which is up a very sharp 6 points from September and the highest reading in 13 years. Full employment is a big plus for consumers amid early indications that wages may finally be moving higher. The expectation that inflation will remain low is another factor boosting confidence in income.

The expectations component is up nearly 7 points to 91.3 with the component for current conditions posting a nearly 5 point gain to 116.4. Low inflation expectations may be a positive for wealth retention but they are not a positive for Federal Reserve policy makers who want to see inflation, and with it the implication of rising demand, move higher. One-year inflation expectations, despite high prices for gasoline, are down a very steep 4 tenths so far this month to 2.3 percent. Five-year expectations are down 1 tenth to 2.4 percent.

This report represents a puzzle for FOMC policy makers with sentiment confirming that the economy is at full employment but inflation expectations suggesting that consumers, as the report notes, are content with limited growth rates in personal income.

Market Consensus Before Announcement
The consumer sentiment index showed only modest impact from Hurricanes Harvey and Irma in September when the index fell 1.7 points to what is a still very strong 95.1. Expectations are calling for a resumption of gains, to a consensus 95.4 for the preliminary October index. However inflation expectations, which are watched closely by FOMC policy makers, have been a key negative, unchanged at 2.7 percent in September despite gains in wages and hurricane pressures in gasoline prices.

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.