Consumer Sentiment Hits Two-Year High

The final consumer sentiment index for January unexpectedly surged to 74.4 -- the highest in two years -- up from a preliminary January reading of 72.8, the Reuters/University of Michigan Surveys of Consumers announced Friday, according to Reuters.The news capped off another decent week for the U.S. economy, during which core durable goods orders rose for the second straight month, quarterly earnings contained few "just awful" reports, Ford (F) returned to profitability, and Q4 U.S. GDP grew a respectable 5.7%.

A Bloomberg News economists' survey had expected the index to rise to a final January reading of 73.0. The index was at 72.5 in December, 66.0 in November, and 70.6 in October. 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 expectations rose to 70.1 in January from 68.9 in December, while the current conditions index rose to 81.1 from 78.0, Reuters reported. Also, the current personal finances index rose to 77.0 from 73.0.

However, the one-year inflation expectations index rose to 2.8% in January from 2.5% in December, and the five-year inflation expectations index rose to 2.9% from 2.7%.

Job Market Concerns Persist

"Consumers are overwhelmingly convinced that the worst is over but nonetheless expect stagnating income and job prospects rather than solid growth during the year ahead," the University of Michigan report said, 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.

Economic Analysis

The pessimist would argue that both the rise in consumer sentiment and the uptrend in GDP over the past two quarters (2.2% in Q3 to 5.7% in Q4) are Pyrrhic victories -- that both reflect misplaced giddiness over what's merely inventory replenishing. In addition, there is the lingering problem of home foreclosures and the U.S.'s high unemployment rate as strong headwinds for the economy.

Conversely, the optimist would say "the recovery has to start somewhere," and given the severe, unreasonable reduction in inventories, a logical place one would look for the recovery to start would be the re-stocking of shelves and business backrooms. Hence, there's no stigma to inventory replenishment -- it's a positive, not a negative. Rising exports, $200 billion in remaining infrastructure spending, an apparent bottoming in lay-offs, and the prospects of auto sector sales gains and further housing sector stabilization, add to the positive story -- and the above factors are being reflected in rising consumer sentiment.

That said, even the optimists would grant that the missing piece of the puzzle is job growth: It has to start to keep both consumer sentiment and the U.S. economy headed in a positive direction.
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