Is an Uptick in Consumer Sentiment Misguided?

Do the stock market tank and the rally in bonds making for lower and lower yields matter to everyone? Maybe not. The University of Michigan has released its preliminary views on consumer sentiment for the month of January, and the report somehow managed to tick higher, despite the market carnage and despite a weak economic picture.

The Index of Consumer Sentiment rose to 93.3 in the preliminary January reading. This was up from an index reading of 92.6 just in December, and it was above the Bloomberg consensus estimate of 93.0. Before you cheer this as a great view, you might want to look back a year. The headline index for January of 2015 was 4.9 points higher at 98.1. As we have seen in other reports, the current conditions are leading the charge rather than expectations — even if they talked up expectations in the actual report’s commentary (see below).

The preliminary January reader on current economic conditions was up at 105.1. That is down 2.8 points from the 108.1 level reported in December and is down by 3.8 points from the 109.3 reading a year ago.

While the report was dominated by the current conditions, the Index of Consumer Expectations’ negativity was less negative than a month earlier. January’s preliminary reading of 85.7 for expectations was up from the 82.7 in December. Still, it is far lower at -5.8 points than the 91.0 reading of January 2015.
[ims_survey]
Investors and economic watchers might want to remember that the University of Michigan’s report on sentiment is far narrower than the consumer confidence report issued by the Conference Board. That being said, it is also released sooner, so it gets a larger weighting as it is semi-live data rather than data from a month or two earlier.

The Dow was last seen down 396 points at 15,982, and the S&P 500 was last seen down over 46 points at 1,875.50. The 10-year Treasury yield breach under the 2.00% mark on Friday, and the 30-year Treasury yield was down at 2.81% on last look.

The Surveys of Consumers chief economist, Richard Curtin, said in the report:

Consumer confidence inched upward for the fourth consecutive month due to more positive expectations for future economic growth. Personal financial prospects have remained largely unchanged during the past year at the most favorable levels since 2007 largely due to trends in inflation rather than wages. Indeed, expected wage gains fell to their lowest level in a year in early January, but were more than offset by declines in the expected inflation rate. The result was that inflation-adjusted income expectations rose to their highest level in nine years. Consumer optimism is now dependent on the continuation of an extraordinarily low inflation rate. Rather than welcoming a rising inflation rate as a signal of a strengthening economy, consumers are now more likely to reduce the pace of their spending and thus act to erase the Fed’s rationale for higher interest rates. Given the favorable overall state of the Sentiment Index, the data continue to indicate that real personal consumption expenditures can be expected to advance by 2.8% in 2016.