Consumer sentiment drops unexpectedly

It was a positive week for investors, but the U.S. economy could not make it a "clean sweep," as consumer sentiment unexpectedly fell in August.

The Reuters/University of Michigan Surveys of Consumers said its consumer sentiment index for August (preliminary) decreased to 63.2 from 66.0 in July, Reuters reported Friday. The index was at 70.8 in June and hit a record low of 51.7 in May 1980.

Economists surveyed by Bloomberg News had expected the index to rise to 68.5 in August.

August sentiment bucks recent positive data

The sentiment decline surprised economists and analysts alike, as it came after a series of data that points to better days ahead for the U.S. economy. The U.S. economy contracted just 1.0 percent in Q2 after a 6.4 percent swoon in Q1. That lessening of the decline, combined with signs of stabilization in the manufacturing and housing sectors, and lower job lay-offs, suggests the U.S. recession is bottoming. Moreover, the approaching bottom -- and the projected turnaround in corporate revenue it implies -- is one reason forward-looking institutional investors have bid-up the Dow and S&P 500 during the past four to five months.

Investors need to 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 percent) of U.S. GDP.

However, investors should not read too much into the Reuters/UMichigan index, as it tends to be less of a market-mover than the more closely followed, comparable index published by The Conference Board. That survey will be released later this month, on Tuesday August 25.

Economic Analysis:
Weighed against the recent string of positive developments for the U.S. economy over the past two weeks, one can put the preliminary August UMichigan data in the category of a "mulligan" -- just act like it doesn't count. If consumer sentiment continued to decline through the fall, that would be a concern, but a one-month dip in a summer month is hardly a data point to panic about, from an investment standpoint.
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