A Brighter Outlook: Consumer Sentiment Jumps in June

The U.S. economy, which grew just 2.7% in the first quarter, may be showing signs of slowing, but consumer sentiment appears to be gaining a little steam: The Reuters/University of Michigan consumer sentiment index unexpectedly rose from a 75.5 revised June estimate to a final June tally of 76.0 -- its highest level in more than two years.

However, consumer sentiment fell sharply during the 2007-2009 recession and the index remains well below normal levels of around 87.

The consensus from a Bloomberg survey had been that June consumer sentiment (final) would remain unchanged at 75.5. The index was at 73.6 in May and at 72.2 in April.

Richard Curtin, director of surveys, said a year-over-year drop in the percentage of poll respondents who reported job losses, from 65% in June 2009 to 29% this June, contributed to sentiment's rise.

"The June 2010 survey recorded the most favorable news heard by consumers about jobs in five years," Curtin said, in a statement, Reuters reported Friday. "Unfortunately consumers do not anticipate significant declines in unemployment during the year ahead."

In the final June poll, the survey's consumer expectations component increased to 69.8 from 68.8 in May, while the current economic conditions component rose to 85.6 from 81.0, Reuters reported Friday.

Arguments in Favor of Bulls or Bears

In general, rising consumer sentiment leads to increases in consumer spending, or the maintenance of a level of spending, while falling consumer sentiment, the reverse. And historically, consumer spending has accounted for 65% to 70% of U.S. GDP.

Further, while June's rise is a modest feather in the cap for the economy, it probably won't resolve the battle between the economic bulls and bears.

The bulls argue that although sentiment has recorded only a minor rise in the past three months, the uptrend remains intact, confirming an expansion that's being propelled by rising exports, better-than-expected corporate earnings, a rebound in manufacturing, and low inflation.

Conversely, the bears argue that the slowdown in the European economy stemming from the eurozone's government debt crisis will combine with sub-par U.S. job growth and tepid consumer sentiment to put the brakes on the U.S. economy in the second half of 2010, possibly tipping the country into a double-dip recession.

In sum, the June rise in consumer sentiment was a modest win for the economic bulls --sort of like winning the first set in a tennis match at Wimbledon. Consumers are slightly more confident now than they were earlier in 2010, but their stance remains guarded. They're not convinced that the recovery is strong enough to create jobs, support further spending on their part in a big way, and improve their personal financial situation.