Consumer Sentiment Research Notes

by Jim Baird on October 12, 2012

Index rises sharply for third consecutive month in October

The University of Michigan Consumer Survey, a measure of the overall optimism of U.S. consumers regarding the state of the economy, rose sharply in October to 83.1 to reach its highest level since late 2007.  Sentiment around current conditions improved, while consumers also expressed greater optimism around expectations for the economy in the coming year.

This month’s surprise to the upside marks the third consecutive month in which Consumer Sentiment not only improved, but exceeded expectations. 

While the collective mood is clearly improving, the index still remains modestly below its historical average.  There’s no question that there’s still a sense of relative unease over three years into the economic expansion.

The rally in stock prices in recent months has likely precipitated a bit more optimism, as consumer sentiment typically responds favorably to higher equity prices. The boost to the market in anticipation of, and ultimately in response to, the Fed’s most recent policy moves has helped to support asset prices even as broad economic data has been mixed at best. It remains to be seen whether the additional easing provided by the Fed will foster a meaningful improvement in the economy in additional to driving asset prices higher. 

The improvement in expectations is a positive development, particularly if some momentum can build over an extended period.  Historically, improvement in that component of the index has boded well for consumer spending in the following year, particularly on cyclically sensitive purchases such as autos and homes.

Although rising sentiment may be a positive for spending, a more robust economy is still needed to spur job creation, bring down the jobless rate, and generate much better income growth.  In the absence of that, confidence will likely falter anew and the ability and willingness of consumers to continue to ramp up spending on a sustained basis will be limited.

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