Consumers Holding Steady in May

consumer spending
consumer spending

May's final Reuters/University of Michigan consumer sentiment index reading edged up 0.3 to 73.6, from the preliminary May reading of 73.3. This will likely prove to be another economic statistic that the market's bulls and bears will argue over. Economists in a Bloomberg survey had expected a 73.3 final May reading.

The bulls will argue that the higher 73.6 reading confirms a nearly two-year uptrend. The index was at 72.2 in April and had hit a cycle low of 51.7 in November, 2008, during the acute stage of the financial crisis.

Conversely, the bears will argue that consumer sentiment has basically flatlined since hitting 74.4 in January -- something that, if the uptrend does not resume, points to a potential pullback in consumer spending in the second half of 2010.

Consumer Sentiment's Significance

There's a lot riding on consumer sentiment. A rising reading usually precedes consumer decisions to buy, and consumer spending has historically accounted for the bulk (65% to 70%) of U.S. GDP. That large contribution may decline amid tighter budgets and a frugal mindset in the post-financial-crisis era, economists caution, but the sentiment-spending link will remain.

In the final May reading, the consumer expectations component rose to 68.8, from 66.5 in April, while the current economic conditions component was unchanged at 81. Meanwhile, the 12-month economic outlook component rose to 83 in May, from 80 in April.

Income, Spending Data Also Inconclusive

What's more, Commerce Dept. data on April personal income and consumer spending released Friday did little to resolve the tug-of-war between the market's bulls and bears.

Personal income did rise 0.4% in April, less than the 0.5% rise generally expected, and had also risen 0.4% in March. Meanwhile, the bears can point to consumer spending, which was unchanged in April when a 0.2% increase was expected. Consumer spending rose 0.6% in March.

Further, with incomes rising faster than consumer spending, the nation's savings rate rose to a 3.6% annualized rate in April, up from a 3.1% in March.

However, even the higher savings rate will likely serve as a point of contention between the bulls and bears. Most economists generally view the nation's higher savings rate as a constructive development after a decade of over-consumption, in many cases paid for with credit. But if the savings rate rises too high, consumer spending will decline, lowering GDP growth.

What would resolve the bull/bear tug-of-war regarding tepid consumer sentiment? Sustained job growth. The economy has added an average of 260,000 jobs in March and April, and if it adds more than 200,000 jobs in May, that would signal to Americans that the U.S. economy is creating jobs in a sustained way, something that historically has triggered an uptrend in consumer sentiment.