Consumer Sentiment Dips: Sign Of Trouble, Or Just Temporary Setback?

by: James Picerno

Regular readers of The Capital Spectator know that the still positive but decelerating trend in personal income and spending has been a concern for some time. Among the risks to worry about when it comes to the key economic reports and the potential blowback for the business cycle, this is near the top of my list. Today’s update on consumer sentiment suggests that the crowd is also worried.

Reuters reports:

Americans turned less optimistic about the economy in early February on worries about falling income even as their outlook on the jobs market rose to a record high, a survey released on Friday showed. The Thomson Reuters/University of Michigan overall index of consumer sentiment fell to 72.5 in early February from January's 75.0, which was the highest level since February 2011. The latest figure fell short of the median forecast of 74.5 among economists polled by Reuters.

Even so, the latest drop is still a blip in the context of the recent revival in consumer sentiment. Yes, today’s dip could be a sign of things to come. But much depends on what happens next with personal income—disposable personal income (DPI) in particular. The latest update on DPI was a sign that the falling rate of annual increases may soon stabilize... maybe. Indeed, DPI jumped 0.4% in December, the biggest monthly rise since last March, and a dramatic turnaround from November’s slight decline. Alas, we won't know if there's fresh momentum until March 1, when the next update on income and spending hits the streets.

(Click chart to expand)

It’s unclear if more good news for DPI is coming, but if there is it’ll surely be closely linked with the ebb and flow of the labor market. On that front, the respectable rise in private nonfarm payrolls for January is encouraging (as is the positive year-over-year change in payrolls without a seasonal adjustment). Will February’s payrolls report also bring good news? Yesterday’s update on initial jobless claims suggests we should be optimistic.

"Bottom line, confidence gave back half the jump seen in January, but at 72.5 is still the 2nd best reading dating back to last May as the labor market has shown signs of continued improvement," says Peter Boockvar, Miller Tabak’s equity strategist.

Deciding if the slip in consumer sentiment has broader import for macro may become easier next week with the scheduled updates for several economic numbers, including retail sales (Tues, Feb 14), industrial production (Wed., Feb 15), housing starts and initial jobless claims (both on Thurs., Feb 16). Meantime, there's a small crack in the rebound to consider. It may turn out to be nothing, but the recovery is still fragile enough to keep everyone guessing for the foreseeable future.