Consumer Sentiment Jumps to Highest Level Since June

Consumer Sentiment Jumps to Highest Level Since June
Consumer Sentiment Jumps to Highest Level Since June

It was another decent week for the U.S. economy as initial jobless claims fell below the psychologically significant 400,000 level and the consumer sentiment index rose to a slightly better-than-expected 75.1 in February (preliminary) -- its highest level in eight months.

The consensus of economists surveyed by Bloomberg was that the preliminary February sentiment reading would rise to 75 from 74.2 in January. The index was 74.5 in December, 71.6 in November and 67.7 in October. At the start of the recession in December 2007, the index stood at 88.9.

"2011 has started with a couple factors that were completely absent in 2010, and one of them is confidence," Tom Porcelli, chief economist for RBC Capital Markets in New York, told Bloomberg News Friday. "Now confidence is starting to come back," which is supporting the U.S. economic recovery.

In February, the current economic conditions component of the sentiment survey surged 5 points to 86.8 in February from 81.8 in January -- its highest reading since January 2008. However, the consumer expectations component dipped to 67.6 in February from 69.3 in January.

Better Days Ahead

Consumers' outlook on inflation remained the same in February. The one-year inflation outlook was unchanged at 3.4% in February; the five-year inflation outlook, unchanged at 2.9%.

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Economists, business executives, and policymakers monitor the consumer sentiment index because, historically, consumers' attitudes have correlated with their decisions to spend. In general, rising sentiment leads to increases in consumer spending, or the maintenance of a level of spending, while falling sentiment predicts the reverse.

February's preliminary consumer sentiment report is a win for the economic bulls, showing that since last autumn, Americans have become more confident that better days are ahead for the economy, and for their personal financial situations. Consumers are encouraged by rises in the stock market, by better-than-adequate corporate earnings growth and by other economic data that indicate that the 18-month recovery is gaining momentum.

The missing piece, as it has been throughout the recovery, is sustained, adequate job growth of more than 200,000 jobs per month. If that occurs, it will increase Americans' job security -- something that, at least historically, has encouraged them to commit to major financial decisions such as buying homes, starting or expanding small businesses, or buying new cars.