Consumer Sentiment Crept Higher in July, but It's Still Depressed

One wouldn't think that two tepid economic data points would be cause for minor relief among investors, but that seems to be case today, as consumer sentiment rose to a better-than-expected 67.8 in July, Reuters reported, after U.S. GDP growth slowed to a milder but not awful 2.4% rate in the second quarter. Still, investors should keep in mind that consumer sentiment remains at its lowest level in about six months.

A Bloomberg survey had expected the final July Reuters/University of Michigan consumer sentiment index to rise to 67 from the preliminary July reading of 66.5. The index was 76 in June, 73.6 in May and 72.2 in April. It hit a cycle-low of 51.7 in November 2008, during the acute stage of the financial crisis.

Consumers Sense Slowing Economy

Richard Curtin, Reuters/University of Michigan director of surveys, said the sentiment reading shows that consumers, like economists, are aware of the signs of a subpar U.S. economic expansion. "Rather than an economy gaining strength, consumers now anticipate a slowing pace of growth, and rather than economic policies acting to improve prospects, economic uncertainty among consumers has greatly increased," Curtin, said, in a statement.

In the final July survey, the consumer expectations component rose to 62.3 from the preliminary July reading of 60.6. This reading was 69.8 in June and 68.8 in May.

Also, the current conditions component rose to 76.5 from the preliminary July reading of 75.5. That component was 85.6 in June and 81 in May.

Consumers' one-year inflation outlook dipped to 2.7% in July from 2.8% in June, and the five-year inflation outlook rose to 2.9% in July from 2.8% in June.

Just a Bullet Dodged

Economists, business executives and policymakers monitor consumer sentiment because, historically, it correlates with consumer decisions to spend. In general, rising sentiment leads to higher consumer spending or the maintenance a spending level. Falling sentiment correlates with the reverse. And historically, the broad consumer spending category has accounted for 65% to 70% of U.S. GDP.

In sum, July's consumer sentiment, like the slack second-quarter 2.4% GDP growth rate, represents a bullet dodged, but little more than that. Although sentiment inched higher in July, it's stuck at a level suggesting that Americans have big concerns about the economy. Consumers appear to be waiting for the same thing the economists are: signs of more-vigorous job creation.