Economy

Consumer Sentiment Remains Firm Into Year's End

Jon C. Ogg

Published: December 23, 2015 11:35 am

Last Updated: January 13, 2020 3:46 pm

The University of Michigan has released its final December reading on consumer sentiment. Its Index of Consumer Sentiment was revised to 92.6. Bloomberg and Dow Jones were both calling for a consensus reading of 92.0, and the final reading in November was 91.8.

What stands out about this final December report is that the sentiment reading is bolstered handily by the current picture rather than by the expected outlook ahead.

The Index of Consumer Expectations was more or less flat sequentially at 82.7, down just 0.2 points from the November reading, but down handily from the 86.4 reading from December 2014.

It was the Current Economic Conditions component that kept the report up. This rose to 108.1 in December. The Current Index was down at 104.3 in November, and it was 104.8 in December of 2014.

Apparently the consumer sentiment survey pool just keeps hanging on to the lesson learned of close to 3.0% inflation through time. The five-year and one-year inflation forecasts were for inflation to be about 2.6%. That is far higher than it has been, and the Fed has been hopeful for the return of 2.0% to 2.5% in inflation.

Economists and investors will have received a larger formal note than normal. That is likely due to it being the last report of 2015. The University of Michigan’s survey of consumers said:

Consumer confidence rose to its highest level since July, with the December reading nearly equal to the 2015 average of 92.9 — which was the highest since 2004. Importantly, all of the improvement was in how consumers evaluated current economic conditions. The December gain was largely due to lower inflation, which bolstered real incomes and brightened buying plans for household durables. Indeed, there have been only three surveys in more than the past half century in which a higher proportion mentioned the availability of price discounts for durables. Overall, the data point toward gains of 2.8% in real personal consumption expenditures during 2016.

Just as consumer optimism became dependent on very low inflation, the Fed has begun to take steps to accommodate a higher inflation rate. Since wages are never first to incorporate inflationary adjustments, consumers will make their purchases even more contingent on low prices. Moreover, given the weakness in the global economy and the strong dollar, discounting will continue unabated. As a result, the Fed policies will need to be much stronger to overcome the disinflationary psychology of consumers.