Consumers Gain a Bit of Confidence

Includes: IYK, VCR, XLP
by: Wall Street Strategies

by Carlos Guillen

On Friday, a bit of positive news came in from the University of Michigan as its revised consumer confidence index ticked higher. This index landed better than expected for April, increasing a bit to 69.8 from the 67.5 level posted in March and landing above the Street's expectation of 69.6. This uptick came in despite the most recent continuing rise of initial claims data. Click to enlarge:

In March, it is apparent that consumers may have become frightened by indications of future inflation, but now this appears to have been built into the psyche of consumers and it is no longer having a significant effect on sentiment. According to the Consumer Sentiment report, consumers said they expect an inflation rate of 4.6 percent over the next 12 months, a belief that remained unchanged from the March survey. Moreover, in the next five years Americans expect a 2.9 percent rate of inflation, compared with the 3.2 percent expectation in the prior month.

The consumer is also feeling better about the economy in light of improving unemployment rate figures, but we still have to stress the fact that the rate is still very high at 8.8 percent, and unemployment initial claims have been heading in the wrong directions most recently. While the unemployment rate has been improving, the improvement has been very slow. The economy is still very fragile, and high volatility in food and fuel prices can shake consumer confidence very quickly. And if the unemployment rate begins to make a turn for the worse, all bets are off.

For now the indications are that the consumer is spending. In March, personal spending and personal income were both a bit better than expected. Personal income grew by 0.5 percent vs. 0.4 percent consensus, and personal spending increased 0.6 percent vs. 0.5 percent consensus. Despite the fact that consumer confidence is below the peak reached in February, the consumer is not penny pinching. Consumer spending is very critical component of the economy, currently representing 71% of GDP, and if consumers hold back on spending as a result of their less confident outlook, the economy can begin to head south.

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