Along with job growth, consumer sentiment for 2012 is slowly working its way up. When people are confident about their financial futures, they spend more. Consumer spending and consumer sentiment are strongly correlated, although they don’t always match exactly every month. The economy depends on us to spend money; in fact, two-thirds of our economy is made up of consumer spending.
The year 2008 was the lowest point in for several years for consumer sentiment and the economy in general. People were reeling from the recession, the stagnant job pool, and the credit and foreclosure crisis. Ever since the summer of 2011, people have started to spend money again, a positive signal to economists, workers and investors. Investors like to see high consumer confidence because it generally equates to strong stock prices. The same is true for bonds as long as it isn’t inflationary growth. Overall, high consumer sentiment is beneficial and boosts the economy.
The Michigan Survey
In order to find out the status of consumer sentiment, Thomson Reuters/University of Michigan creates a survey that inquires about financial health, conditions, and attitudes. They send it out to 500 homes every month. In December of 2011, the consumer sentiment index was at 69.9. On January 13, 2011, they discovered the index had risen to 74, which was more than they had expected. For even more comparison, the index in November was 67.7.
Why is consumer sentiment rising? A few factors, including lower gas prices and lower unemployment rates are raising this particular index. On the other hand, it may be stymied by lowered home values and limited salary increases. Nationwide, the unemployment rate is around 8.5 percent, which is very low compared to the rate it was two years ago. As for gas prices, AAA states that the average price of one gallon of gas is $3.39, which is lower than it was over the summer.
Inflation Expectations
When surveyed about financial confidence levels, consumers responded to a future inflation estimate. The survey takers estimated that the inflation rate would rise to 3.2 by 2013. Shoppers have noticed that the cost of many food staples is rising. Coffee, meat, vegetables, peanut butter, and rice are more expensive than they were only a year ago. Going to the grocery store is starting to become an expensive endeavor for many families.
Outlook for 2012
It looks like 2012 will be a good year for consumers and investors as long as the momentum keeps going in an upward direction. Once the housing economy stabilizes and jobs become available, the consumer sentiment level should rise even more.
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