Consumer Sentiment: Americans See Better Days Ahead

Consumer sentiment rises in DecemberThe U.S. may not be generating the "white-hot" fire associated with torrid job markets like Australia's, but it may be showing some smoke. Consumer sentiment unexpectedly jumped 2.6 points to 74.2 in December (preliminary) -- a six-month high. And the current economic conditions component rose to its highest level in about three years.

A Bloomberg survey had forecast sentiment to rise to 72 in December from 71.6 in November. The index was 67.7 in October and 68.2 in September. At the start of the recent recession in December 2007, it was 88.9.

Richard Curtin, director of surveys for the Thomson Reuters/University of Michigan Surveys of Consumers, said Americans' expectation that the Bush-era income tax cuts would be extended is showing up in the data.

"While the recently negotiated tax agreement . . .occurred too late to have much impact on the data, a widespread expectation among consumers that the Bush tax cuts would be extended existed," Curtin said in a statement, Reuters reported Friday.

Current Conditions Sentiment Highest Since 2008

President Obama and congressional Republicans this week reached a deal to extend the tax cuts, but the package needs congressional approval, and several Democrats want to modify the accord.

Still, the agreement combined with a slightly brighter jobs picture and solid corporate earnings so far in 2010 to boost Americans' view of current economic conditions. That component jumped 3.6 points to 85.7 in December -- its highest level since January 2008. It was 82.1 in November and 76.6 in October.

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Also, the consumer expectations component rose 2 points to 66.8 in December from 64.8 in November and 61.9 in October.

The one-year inflation outlook dipped to 2.9% in December from 3% in November and 2.7% in October. The five-year inflation outlook also inched lower, to 2.7% in December from 2.8% in both November and October.

Economists, business executives and policymakers monitor consumer sentiment because consumer attitudes correlate with decisions to spend. In general, rising sentiment leads to more consumer spending, or at least a steady level of spending. Falling sentiment has the reverse effect. And broadly measured, consumer spending has accounted for a majority of U.S. GDP.

Modest and Guarded Optimism

December's first consumer sentiment reading picked up right where November's tally left off, with a sense that economic conditions have improved: The 3.6-point rise in the current conditions component bolsters that notion.

Of course, Americans know the economy suffered enormous damage, including a staggering 8.4 million layoffs, during the recent recession, and they know it'll take years to replace those jobs. So, their optimism is modest and guarded. However, with the major layoff period over and most large U.S. corporations efficient and well-positioned for growth, Americans now sense that better days are ahead for the economy, and for themselves.
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