Consumer sentiment picked up in the advance estimate of the University of Michigan Consumer Sentiment Index released today. While the index is still hovering near recession lows the pick up in sentiment by consumers is encouraging. As the market rebounded in October and some of the domestic economic stresses subsided attitudes began to improve after falling back to recession lows this summer.
While the index is certainly a very long way from getting back to levels that would considered “healthy” the improvement, which feeds into the Leading Economic Index, signals that at least for the moment the consumer is hanging in there. However, it is important to keep focused on the bigger picture as this index can, and has in the past, reverse course sharply.
The advance estimate for December showed an increase of 3.6 points to 67.7 led by a strong 5.7 point jump to 61.1 in the leading component of expectations. The gain in expectations suggests that consumers see improvement for their job prospects and for their income prospects, keys for acceleration in consumer spending. The one thing to keep in mind here is that the consumers “expectations” are based on past history. Job numbers have improved lately which lead to stronger expectations by the consumer that their job prospects will improve in the future. However, as we showed yesterday, the underlying job environment is much worse than the headlines state.
The consumer’s assessment of current conditions showed very little improvement coming in at a still very soft level of 77.9. Inflation expectations are benign at the moment despite $100 oil which has, however, yet to inflate prices at the gas pump. However, that could change rather quickly as we noted previously.
Stronger improvement in the jobs market together with an easing in the volatility of the financial markets would go a long way to further improve the consumer’s mood further as they consumer responds to immediate stimuli and then projects that forward. This is why Ben Bernanke in his promotion of Quantitative Easing referred to the boosting of asset prices as necessary to help fuel consumer sentiment.
We continue to see a few signs of improvement on the margins but not enough yet to signal it “all clear”. Caution is still highly advised with a focus on income over growth, conservation of principal over risk and hedged portfolios over long only biases.