Consumer sentiment takes a tumble in November

Chalk up a mixed-bag week for the U.S. economy: Jobless claims continued to decline, the Dow made progress solidifying gains above 10,000 -- but consumer sentiment plunged.

The Reuters/University of Michigan Surveys of Consumers says its consumer sentiment index for November (preliminary) decreased to 66 from 70.6 in October, Reuters reported Friday. Further, the index of consumer expectations declined to 63.7 from 68.6 in October, while the current conditions index fell to 69.6 from 73.7 in October.

A Bloomberg News survey had expected the November preliminary sentiment index to rise slightly to 71 for November. It stood at 74 in September and 67.5 in August. It hit a cycle low of 55.3 in November 2008. The record low of 51.7 was set in May 1980.

Separately, the Bloomberg Professional Global Confidence Index declined to 60.3 November from 61.7 in October, Bloomberg News reports. However, the index remained above 50 for the fourth consecutive month, meaning there were more optimists than pessimists in the survey, which questioned more than 1,500 Bloomberg users Nov. 2 to Nov. 6. The University of Michigan's Consumer Survey Center questions 500 households each month on their financial conditions and attitudes about the economy.

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 of U.S. GDP. And Bloomberg's PGCI provides insights into how institutional investors and investment professionals feel about the economy and investing conditions.

Further, November's unexpected drop in consumer sentiment will likely renew the debate on the sustainability of the U.S. economic recovery. Some economists argue that housing sector stabilization, manufacturing output increases, a rise in exports and government spending via 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 3.5% increase in third-quarter U.S. GDP as evidence of the recovery's start.

Conversely, another economists' camp argues that the 10.2% U.S. unemployment rate, high public/private debt levels and the lingering hangover from the housing bust (including foreclosures) will combine with high oil prices to, at minimum, limit GDP growth, and, at worst, tip the economy into a "double-dip recession."

Economic Analysis: To be sure, this is a disappointing preliminary reading for November consumer sentiment, with consumers still taking a reserved stance, given high unemployment and overall weak job market conditions. If consumer sentiment continues to decline, that would likely weigh on GDP, given the historically strong correlation between consumers' attitudes and spending.

That said, the economic recovery thesis remains intact among most economists, and here's one reason why: After a recovery has started, the U.S. economy has never fallen into a double-dip following a recession of 18 months or longer. Moreover, the draw-down in factory inventories and pent-up demand suggest the U.S. will remain on the recovery road. But consumers, understandably, aren't celebrating just yet.

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