According to the preliminary Reuters/University of Michigan Consumer Sentiment Survey, consumer sentiment in February showed an unexpected decline disappointing expectations. Analysts expected to see a reading of 76.0 for the past two weeks, but the actual number was closer to 72.5, indicating a slight decrease in consumer sentiment compared to January’s final reading of 75.0. To put these results in context, consider that consumer sentiment has averaged 85 since the survey began in 1978 and averaged in the high 60’s during recessions. This preliminary estimate of February consumer sentiment suggests that US is pulling out of the recession but that the economy has a way to go until it returns to a “normal” state.
The University of Michigan’s Consumer Survey Center partners with Reuter to determine the consumer sentiment index. Data is collected by questioning 500 households every month about their financial conditions, their perceptions of the economy and their attitudes related to the economy. The survey asks in-depth questions to derive important information regarding consumers’ feelings about the economy. This information helps investors and consumers to gauge the confidence that households have about the economy. If the households indicate positive feelings about the economy and the consumer sentiment index rises, businesses can anticipate a higher demand because consumers are more confident about the state of the economy. In other words, if consumers feel comfortable with their jobs and are receiving income, they are typically more likely to spend their money and place it back into the economy. If the consumer sentiment index decreases, as was the case in the beginning of February, this may indicate that consumers are concerned about the state of the economy and may hesitate to spend money. If demand decreases, businesses are less likely to accumulate inventories and more likely to lay off employees.
According to the data, consumer sentiment is most aligned with consumer’s feelings regarding inflation and employment conditions. While other factors may affect the consumer sentiment index, such as war, political happenings or other non-financial matters, consumers are most influenced by their perception that their dollar is worth less. Similarly, a fear of losing employment may also play a role in determining consumer sentiment.
Due to the fact that information regarding the consumer sentiment index is released on a monthly basis for the previous month, the information contained in the report is less recent than other reports indicating the state of the economy, such as the jobless claims report. For this reason, the report should be taken into consideration with other economic indicators to surmise an opinion on the economy.