Consumer Sentiment Rises Slightly, But Falls Short of January Forecast

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It was a decent week for the U.S. economy: Inflation remained low in December and for all of 2009, continuing claims for unemployment again declined substantially, and the Reuters/University of Michigan consumer sentiment index improved in January to 72.8 from 72.5 in December (final), although the preliminary reading for the month came in below the consensus estimate, Reuters reported Friday.A Bloomberg News economists' survey had expected the index to rise to a preliminary January reading of 74.0. The index totaled 66.0 in November, 70.6 in October, and 74.0 in September. 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.

Further, the index of consumer expectations fell to 67.5 in January from 68.9 in December, while the current conditions index rose to 81.0 from 78.0 in December, Reuters reported.

"While consumers anticipated continuing gains in the overall economy, few consumers expected an immediate shift toward the type of positive developments that would improve their job and income prospects," Richard Curtin, director of Reuters surveys, said in a statement, 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 (60-65%) 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.

Economic Analysis

The pessimist will argue that January's preliminary consumer sentiment reading is a sour note for the U.S economy, as it did not meet the Bloomberg News consensus estimate. However, even though the index only inched higher, the year-long uptrend remains intact. As long as the long-term uptrend continues, one-month dips and underperformances can be ignored.

Also, when combined with the week's other good news on more, substantial declines in continuing unemployment claims, healthy gains in industrial production, and low inflation, the week's data provided more evidence that the U.S. economic expansion is, at minimum, not weakening, and, at best, is starting to experience some momentum -- and that's good news for policy makers, business executives, and investors, alike.
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