The consumer sentiment index edged 4 tenths higher from mid-month to end September at a decidedly dismal 68.1, down from August's 69.5. This index had been recovering earlier in the year but September marks a second month of retracement. The expectations sub-index did firm 5 tenths in the month to 66.0 but was offset by a 4.3 point fall in current conditions to 71.4. The report cites the risk of a government shutdown and the beginning of an auto strike as ongoing negatives.

Consumer spirits may be sagging but the good news is that inflation expectations are sagging too, and significantly so in September. Year-ahead expectations fell 3 tenths to 3.2 percent (up 1 tenth from mid-month) while 5-year expectations fell 2 tenths to 2.9 percent for the lowest reading in a year. Policy makers will especially greet the latter as indication that long term inflation expectations are benign, a fact that limits the need for further policy tightening.

Consumer sentiment is expected to end August at 67.7, unchanged from the mid-month flash and nearly 2 points lower than July.

The University of Michigan's Consumer Survey Center questions households each month on their assessment of current conditions and expectations of future conditions. Preliminary estimates for a month are released at mid-month and are based on about 420 respondents. Final estimates are released near the end of the month and are based on about 600 respondents.

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 and, in large part because of this, investors in the stock and bond markets enjoyed huge gains. It was during the late nineties that the consumer sentiment index hit its historic peak, reaching levels that were never matched during the subsequent 2001 to 2007 expansion nor during the long expansion following the Great Recession.

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.