Consumer Sentiment Falls Unexpectedly in February

Record a mixed-bag week for the U.S. economy: The downtrend in continuing unemployment claims resumed in a big way (down by 43,000), the Dow battled to remain above 10,000 despite the continually-evolving Greek debt saga, but consumer sentiment underperformed. The Reuters/University of Michigan Surveys of Consumers measure consumer sentiment: Their preliminary index for February fell to 73.7 from 74.4 in January, Reuters reported Friday.Economists surveyed by Bloomberg News had expected the index to rise to a February (preliminary) reading of 75.0. The index was at 72.5 in December, 67.4 in November, and 70.6 in October. The index hit a cycle low of 55.3 in November 2008; its record low of 51.7 was set in May 1980.

Further, the index of consumer expectations fell to 66.9 in February from 70.1 in January and 68.9 in December. However, the current conditions index rose to 84.1 in February from 81.1 in January and 78.0 in December, Reuters reported.

Little Fear of Inflation

Despite record levels of fiscal/monetary stimulus, Americans still don't expect inflation to heat up in the months ahead. The 1-year inflation expectations index fell to 2.7% in February from 2.8% in January and 2.5% in December, and the 5-year inflation expectations index fell to 2.8% in February from to 2.9% in January and 2.7% in December.

Richard Curtin, director of the surveys, said the high unemployment rate is weighing on consumers' outlooks.

"Few consumers anticipated any significant declines in the jobless rate any time soon, and the majority expected recurrent economic weaknesses over the next several years," Curtin said in a statement, Reuters reported.

Investors should pay attention to consumer sentiment because it usually precedes consumers' decisions to buy (rising sentiment) or hold off making purchases (falling sentiment). 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 optimist would point to an adequate performance by Fortune 500 companies in the Q4 earnings season, and the resumed downtrend in jobless claims, as bullish signs.

The pessimist would point to the lingering problem of home foreclosures, the high unemployment rate, and consumer sentiment that remains guarded, as strong headwinds for the economy.

Bottom Line: The U.S. economy, although obviously in a deep hole -- it's operating well below capacity with a horribly high unemployment rate -- is beginning to show the signs of rising demand: A recovery is under way, layoffs have peaked, and commercial activity appears to be strengthening. Hence, the bias is tipped toward gradually improving economic conditions. Longer-term, that's good news for the U.S. stock market.