Consumer sentiment rose nearly five points between September and October, far beyond what analysts forecast. According to the University of Michigan-Thomson Reuters sentiment gauge, the preliminary October reading rose to 83.1 from its final September reading of 78.3. In addition to the four-point increase in September and the two-point gain in August, the sentiment level is now at its highest since September 2007.
“We believe that the Michigan confidence index hitting the highest levels since September 2007 should remain a positive as consumers continue to become more optimistic,” Gennadiy Goldberg, a strategist at TD Securities, told Marketwatch. “Improved confidence should in turn begin to filter more prominently into consumer spending, thereby helping to support the economic recovery.”
The U.S. consumer sentiment gauge measures consumers’ attitudes toward their personal finances as well as business and purchasing conditions. Economists monitor consumer sentiment to anticipate the direction of consumer spending, which accounts for about 70 percent of total economic growth. In the year prior to the Great Recession, the gauge averaged about 87.
Other figures measuring economic growth have mirrored the gauge, which may have received a push from rising stock and property values, as well as a falling unemployment rate.
“We are getting some quite interesting signals from consumer sentiment and employment data—both (the) unemployment rate and initial claims—that there has been some quite significant improvement in the economy,” David Sloan, an economist at 4Cast in New York, told Reuters.
Other economists agree consumer sentiment is definitely being driven by other markers.
“It’s a combination of rising home prices and higher equities,” Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York, told Bloomberg. “Consumers have, all things considered, been spending reasonably well.”
The Bloomberg Consumer Comfort Index also hit a three-month high last week, as more Americans agreed now is a good time to make purchases. Furthermore, the Michigan index of consumer expectations, which projects consumer spending in six months, also climbed—indicating recent economic growth may be sustainable. The index jumped from 73.5 in September to 79.5 in October—its highest value since July 2007. The survey director attributes the rapid increase to consumer attitudes toward the economy.
“What changed was how they (consumers) evaluated economic conditions,” survey director Richard Curtin said in a statement. “Economic conditions during the year ahead were expected to be ‘good’ by more consumers, and more consumers expected ‘good’ economic times over the next five years.”
Attitudes toward inflation may have played a role in the recent boosts in consumer attitudes. In the October confidence report, consumers said they expect inflation of only 3.1 percent in the next 12 months. Last month they expected prices to increase 3.3 percent in the upcoming year. Americans surveyed said they expected an inflation rate of just 2.6 percent in the next 5 years, the lowest compared with a response of 2.8 percent in last month’s survey and the lowest expectation since March 2009.
However, a Reuters report indicated U.S. producer prices are rising and gasoline prices continue to soar. Economists argue, though, that other prices have not been affected.
“If you take out food and energy you are essentially looking at a number that didn’t go anywhere and was actually probably a little weaker than expected,” Cary Leahey, an economist at Decision Economics in New York, told Reuters. “These kinds of energy prices are debilitating to the economy and it is one of the reasons why we haven’t been able to get any kind of a glide speed above a 2 percent annual (growth) rate.”