Consumer sentiment edged higher in March to 78.6 from a revised 77.6 in February. Even with this modest increase, consumer sentiment remains relatively low relative to historical norms as consumers attempt to make sense of the mixed economic landscape.
Recent increases in fuel costs and the immediate hit to discretionary income caused by higher payroll taxes on working households have forced adjustments to family budgets. The preferred response was to cut savings to maintain spending levels. In January, the savings rate dropped to just 2.2%, well below the 3.9% rate for 2012.
Today’s report on personal income and spending painted a modestly brighter picture. Spending increased by 0.7% for the month, supported by a 1.1% increase in disposable income. Moreover, the savings rate also increased to 2.6%, suggesting that consumers are attempting to strike a balance between maintaining their spending habits while rebuilding their savings as well.
Although consumers remain wary about the outlook for the economy over the next few quarters, the recent decline in the jobless rate and steady improvement in the housing market are both positive trends. Both were hit hard in recent years and continued advances in job creation and housing market fundamentals should underpin gradual improvement in the collective consumer mood.
Whether or not that continues remains to be seen, but gains in housing and portfolio values have the potential to support a sense of relief for consumers who feel a bit wealthier and, in response, contribute to a virtuous cycle of spending and a growing economy.