Final October tally shows drop in consumer sentiment

It was a decent week for the U.S. economy: Q3 U.S. GDP growth totaled 3.5 percent – not robust, but above economists' expectations for the quarter and further evidence that the economic recovery is underway. However, consumer sentiment fell for the month.

The Reuters/University of Michigan Surveys of Consumers said that although its consumer sentiment index for October increased to a final reading of 70.6 from the 69.4 preliminary reading for the month, as Reuters reported Friday, it was down from the September reading of 74.0. The index hit a cycle low of 55.3 in November 2008 (its record low of 51.7 was set in May 1980).

A Bloomberg survey had expected a final index reading of 70.0 for October.

The index of consumer expectations declined to 68.6 from 73.5, while the current conditions index inched higher, to 73.7 from 73.4, 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 percent) of U.S. GDP.

Despite the lower reading, October's 70.6 consumer sentiment reading and roughly year-long, modest rise in the index is consistent with a U.S. economy that's recovering at a moderate pace -- a trend most economists say will continue. Housing sector stabilization, manufacturing output increases, a rise in imports, and government spending from the fiscal stimulus package will likely create enough momentum to pull the U.S. economy out of its worst recession in more than 25 years.

Also, the 3.5 percent Q3 U.S. GDP increase provided further evidence of this trend, and while it's only one-quarter's worth of information and not nearly enough to declare that the recession is officially over, the increase is consistent with the mild economic growth track.

Analysis: To be sure, caution remains the operative phrase among U.S. consumers. For the most part, the uncertainty is being driven by the enormous number of jobs the U.S. economy has lost in the past 20 months, and Americans' concern over the potential for additional cutbacks.

Consumers will not take their cue solely from the stock market's rise, or economists' outlook, or GDP data that indicates the economic recovery has started: they'll need to see tangible evidence that affects their lives -- namely, an end to job cuts and the resumption of monthly job gains with a declining U.S. unemployment rate. Historically, that's when Americans have relaxed, and started thinking about bigger purchases, such as a home improvement, a room addition, or a new car.

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