The U.S. economy is hardly on fire, but sparks are starting to fly as consumer sentiment rose again. In December the widely watched index hit 74.5 -- its highest level since June -- as Americans sense an improving job market.
A Bloomberg survey had expected sentiment would rise to 75 in December from a preliminary December reading of 74.2 and from 71.6 in November. The index was 67.7 in October and 68.2 in September. At the start of the recent recession, it was 88.9 in December 2007.
Richard Curtin, director of surveys for the Thomson Reuters/University of Michigan Surveys of Consumers, said Americans who read the news can sense that economic conditions, while still not normal, are improving. "The overall tenor of news about recent economic developments was on balance more favorable than at any time during the past six years," Curtin said, in a statement, Reuters reported.
The current conditions component rose to 85.3 in December from 82.1 in November and 76.6 in October. The consumer expectations component rose as well, to 67.5 in December from 64.8 in November and 61.9 in October.
Rising Sentiment = Rising Spending
The one-year inflation outlook was flat at 3% in December, the same as in November and up from 2.7% in October. The five-year inflation outlook was flat as well, totaling 2.8% for the last three months.
Economists, business executives, and policy makers monitor consumer sentiment because, historically, consumer attitudes have been correlated with consumer decisions to spend. In general, rising sentiment leads to increases in consumer spending, or the maintenance of a level of spending; falling consumer sentiment, the reverse.
December's final consumer sentiment tally provides additional evidence of the economy's status as the nation prepares to start the new year. The economy is growing at a modest pace, with third quarter GDP revised up to a 2.6% growth rate from the initially estimated 2.5% rate. Retail sales are encouraging, and quarterly corporate earnings in the fourth quarter are likely to again be adequate for most S&P 500 companies.
The one missing piece is job growth -- a dimension of the economy which historically is one of the last indicators to turn positive in a big way. Provided adequate job growth occurs, and the unemployment rate declines, look for consumer sentiment to rise to even higher levels in 2011.