Consumer Sentiment Rises Slightly, Thanks to Encouraging Trends

Consumer Sentiment Index Jumps Slightly in January
Consumer Sentiment Index Jumps Slightly in January

It was a mixed week for U.S. economy as initial jobless claims unexpectedly rose, but both U.S. GDP growth and a key consumer indicator showed signs of strength: The consumer sentiment index rose to 74.2 for the final January reading, 1.2 points above the month's preliminary reading, but slightly below December's 74.5 tally.

Economists surveyed by Bloomberg had predicted the sentiment index would total 73, up from its readings of 71.6 in November and 67.7 in October. At the start of the recession in December 2007, the index was at 88.9.

U.S. GDP grew at a 3.2% pace in the fourth quarter, less than the 3.5% Bloomberg estimate, but faster than the 2.6% pace of growth of the third quarter. The stronger growth rate makes it more likely the U.S. economic recovery will progress to a self-sustaining expansion. The stock markets, however, are reacting badly today to the lower-than-forecast GDP report as well as to some earnings reports that disappointed investors.

That stronger U.S. economy helped boost the spirits of consumers, with the federal tax cut extension and hopes about an improving job market offsetting concerns about rising gasoline and food prices.

Tax Cut Extension Helps Boost Mood

"The tax cuts, nonetheless, helped to improve overall prospects for the national economy, including job prospects," Richard Curtin, director of the Thomson Reuters/University of Michigan survey, said in a statement, Reuters reported.

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There were two additional bright spots in the final January sentiment report. The consumer expectations component rose to 69.3 -- its highest level since June -- from the 68.2 preliminary January reading and 67.5 in December. Also, the 12-month economic outlook component, although unchanged at 87, nevertheless remained at its highest level since September 2009.

However, the current economic conditions component of the index dropped from 85.3 in December to 81.8 in the final January tally, though it was higher compared to the 79.8 preliminary reading.

Also, the one-year inflation outlook rose to 3.4% in January from 3% in December and November, and 2.7% in October. The five-year inflation outlook rose to 2.9% in January, after registering three straight months at 2.8%.

January's consumer sentiment index result can be categorized as a qualified positive. On one hand, consumers are concerned about the large jump in gasoline prices, and the seemingly continuous gradual increases in food prices -- two trends can cut substantially into households' disposable income. On the other hand, consumers see encouraging signs in the stronger economy, solid corporate earnings, and in a job market in which the period of large layoffs appears to be over.