Consumers are feeling more optimistic. That is the good news. Unfortunately, they are as optimistic today as they usually are during a recession. In the University of Michigan’s mid-month release today the index rose to 74.0 vs 69.9 in December. While the index has been moving up since the August lows of 55.7, following the debt ceiling debacle and the blowout of the Euro-Zone crisis, it has yet to attain the levels from the beginning of 2011.
The composite components both showed gains with expectations up nearly 5 points to 68.4 and current conditions up 3 points to 82.6. However, let us not forget that gasoline prices fell sharply late last year which acted as about a $60 Billion tax cut for consumers going into the holiday shopping period. Those extra dollars in their wallets, combined with a relaxation of headline driven anxiety, has allowed for consumers to regain their composure somewhat. This is why, as we have discussed recently, that many of the economic gains seen in the 3rd and 4th quarters are likely ephemeral as the “pent up” demand caused by the economic shut down over the summer has likely run the majority of its course.
Currently, although it will be changed on the 26th of this month, the UofM index is part of the Leading Economic Indicators index. I want to suggest that consumer sentiment is really more of a coincident indicator at best. As you can see in the chart there is a high degree of correlation between the ebbs and flows of the monthly changes in the index and the monthly changes in attitudes in consumer sentiment.
This, of course, is entirely logical as consumer sentiment is really a function of how consumers “feel” at any given point during the survey period. If things are generally going well then their “sentiment” will be more positive than if the headlines are screaming about unemployment issues, a Greek riot and plunging stock prices.
Naturally, if consumer confidence is driven by the “wealth effect” created by rises in the stock market, then nothing affects one’s feeling wealth more than having a job. Recent upticks in employment in the last couple of months, mostly seasonal hiring for the holiday shopping period, fueled the headlines with economic revival stories has given consumers a sense that things are improving. The chart shows the 3-month net change in employment versus the UofM index.
The recent downturn in the index may be already hinting that the recent pick up in sentiment may have already reached its current peak. With the jump in jobless claims this past week, and the seasonal hiring season behind us, we may well see employment show signs of weakness in the coming months ahead. Any weakness in employment or the markets due to a resurgence of concerns over the Euro-Zone, the next debt ceiling debate or weakening corporate profitability could quickly impact consumer sentiment which remains fragile.
The bottom line is that while the uptick in consumer sentiment is currently a very welcome sign and is supportive of the recent market “buy” signal – we want to caution individuals of reading too much into the number. The pickup in confidence issmall and the index is still constrained at levels that, at any other time in history, we would be discussing the depths of a recessionary spat – not hopes of a recovery.