Consumer sentiment surges in December, beating estimates

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Consumer sentiment unexpectedly soared in December, topping off a week in which continuing jobless claims declined further and the Dow made progress solidifying gains above 10,000. The Reuters/University of Michigan Survey of Consumers said its consumer sentiment index for December (preliminary) surged to 73.4 from 67.4 in November, Reuters reported Friday.

The index totaled 70.6 in October, 74.0 in September. and 67.5 in August. The index hit a cycle low of 55.3 in November 2008, and the index's record low of 51.7 was set in May 1980.

A Bloomberg News surveyed had expected the index to rise to 68.2 in December (preliminary).Further, the index of consumer expectations rose to 68.9 in December form 66.5 in November, while the current conditions index jumped to 79.1 from 68.8 in November, Reuters reported.

Investors should pay attention to consumer sentiment because it usually precedes consumer decisions to buy (rising sentiment) or hold off on purchases (falling sentiment) -- and historically, consumer spending has accounted for the bulk (60% to 65%) of U.S. GDP.

The University of Michigan's Consumer Survey Center questions 500 households each month on their financial conditions and attitudes about the economy.

Fodder For Market's Bulls

Further, December's unexpected leap in consumer sentiment will likely provide fodder for the stock market's bulls, who argue that the U.S. economic recovery is gaining momentum. Many economists in this camp argue that housing sector stabilization, manufacturing output increases, a rise in exports, and government spending from the fiscal stimulus package will create enough momentum to pull the U.S. economy out of its worst recession in more than 25 years. These economists cite the 2.8% increase in Q3 U.S. GDP as evidence of the recovery's start.

Conversely, another camp argues that the U.S.'s 10.0% unemployment rate, high debt level, lingering hangover from the housing busts (including mortgage foreclosures), will combine with high oil prices to, at minimum, limit GDP growth, and, at worst, tip the economy back into recession -- a "double-dip recession." These economists generally argue that the workforce is not large enough -- nor median incomes high enough -- to generate self-sustaining demand.

Analysis

The survey certainly showed a nice, sizable gain in consumer sentiment, with the qualifier that it's the preliminary reading for December. The December consumer sentiment reading is important for two reasons. First, it gives institutional investors and analysts a reading regarding what consumers are thinking in the midst of the holiday shopping season -- obviously a key quarter for retailers. Second, like January, it provides clues regarding consumer attitudes toward the new year: December is not a stand-alone month -- consumers are thinking about how they'll fare in 2010, as well. Hence, the jump in sentiment to 73.4 suggests consumers' outlook toward the economy is improving: They know the economy has been in a costly, hurting recession, but they expect economic conditions to improve in the quarters ahead. Given the link between consumer attitudes and spending, that's good news for the economy, and, by extension, for corporate earnings and the stock market.
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