Consumer Sentiment and Spending Still Support U.S. Recovery

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It's been a mixed, holiday-shortened week for the U.S. economy: New home sales declined, but the Dow continued to solidify gains over 10,000 and while the Reuters/University of Michigan Consumer Sentiment index missed estimates and was revised lower, it still improved in December, totaling 72.5 for the month (final), up from 67.4 in November.A Bloomberg News economists survey had expected the index to rise to a final December reading of 73.5 from a preliminary December reading of 73.4. The index totaled 70.6 in October, 74 in September, and 67.5 in August. It hit a cycle low of 55.3 in November 2008, and the index's record low of 51.7 was set in May 1980.

Further, the index of consumer expectations rose to 68.9 in December from 66.5 in November, while the current conditions index rose to 78.0 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 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.

Consumer Spending Rises Again

Separately, both U.S. incomes and consumer spending rose in November, the U.S. Commerce Department announced Wednesday. November personal income rose 0.4%, and real consumer spending rose 0.2% -- the sixth rise for consumer spending in the past seven months.

Equally significant, inflation remains tame. Consumer prices rose just 0.2% in November, the Commerce Department said, with prices rising only 1.5% in the past year. Also, core prices (which exclude the often-volatile food and energy component) rose just 1.4% in the past year -- or well within the U.S. Federal Reserve's "comfort zone" for inflation.

In addition, the U.S savings rate held steady at 4.7% in November, as Americans continued to find ways to eliminate needless expenses in order to repair balance sheets hurt by a decade of over-consumption, and by the housing market's slide.

Analysis

The pessimist will argue that since the Reuters/University of Michigan's consumer sentiment December reading came in slightly below the consensus estimate, it represents a negative -- an underperformance -- but that's really hair-splitting. It's still higher compared to November, and it has been in an uptrend for roughly one year.

Also, consumer spending rose in November, continuing a roughly half-year uptrend. While few expect consumer spending to occupy as large a portion of the U.S. economy as it has in previous expansions, rising consumer spending nevertheless remains a critical component of U.S. GDP growth, hence the uptrend is bullish for the economy and U.S stock markets.

Finally, inflation remains under control -- it's running at a roughly 1.5% rate for the year. The low inflation rate will make it easier for the U.S. Federal Reserve to maintain its monetary and quantitative easing policy into 2010 to stimulate the U.S. economy.
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