Consumer Sentiment Index Jumps to Highest Level in Three Years

Consumer Sentiment Index Jumps to Highest Since in January 2008
Consumer Sentiment Index Jumps to Highest Since in January 2008

The markets may have had a lousy week as oil prices surged, thanks to continued political unrest in the Middle East. Plus, fourth-quarter U.S. GDP growth was revised down to 2.8% from 3.2%. But the consumer sentiment index rose to a better-than-expected 77.5 in February -- its highest level since January 2008.

The consensus prediction of economists surveyed by Bloomberg had been for the final February sentiment reading to be unchanged from its preliminary reading of 75.1, up from January's revised 74.2 tally. The index was at 74.5 in December, 71.6 in November and 67.7 in October. In December 2007, at the start of the recession, the index stood at 88.9, and it hit a cycle low of 55.3 in November 2008, during the financial crisis' acute stage.

The consumer sentiment survey took place before the Commerce Department's announcement Friday of the revised GDP data, which showed the world's largest economy grew at a slower pace in the fourth quarter than first projected. The revision was attributed to a slightly smaller increase in consumer spending and a much larger decline in state and local government spending.

In the fourth quarter, consumer spending rose at a 4.1% annual rate, compared to the 4.4% previous estimate. State and local government spending declined at a 2.4% rate, compared to the previously estimated 0.9% dip. In the third quarter, consumer spending rose 2.9%.

Inflation Expectations Unchanged

A closer examination of the sentiment survey shows that its current economic conditions component surged 5.1 points to 86.9 -- its highest reading since January 2008, indicating rising optimism about the present. The consumer expectations component rose to 71.6 in February from 69.3 in January.

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

Economists, business executives and policymakers monitor the consumer sentiment index because, historically, consumer attitudes have been correlated with decisions to spend. In general, rising sentiment leads to increases in consumer spending, or the maintenance of a level of spending, while falling consumer sentiment precedes more frugal behavior.

Oil Price Spikes Could Weigh on Sentiment

February's consumer sentiment report can be read as a qualified win for the economic bulls. It's qualified because although consumer sentiment has risen for the past six months -- roughly in sync with the strengthening U.S. economy and improving job market -- the rapidly changing geopolitical climate makes even the latest consumer survey feel less than current.

Case in point: The Middle East uprisings that have pushed oil prices up more than 10% in the past two weeks to about $97 per barrel. If crude prices continue to rise or remain near $100, that will trigger a prolonged rise in gasoline and diesel prices, which would weigh on consumer sentiment. High energy prices cut Americans' disposable income and increase business operating costs.

However, if Mideast political conditions stabilize and oil retreats back to levels of $80 to $85 per barrel or lower, the uptrend in consumer sentiment will likely continue. That would help support consumer spending -- and corporate revenue and earnings growth -- in the quarters ahead.