February Consumer Sentiment Index Shows Fears of Inflation

Written by: Scott Sery

The Thomson Reuters/University of Michigan’s March preliminary consumer sentiment index report showed that overall consumer’s in the US are wary of the future of the economy.  The index slipped 1 point from 75.3 in February to 74.3 this month.  This drop ends a streak of growth in sentiment that started in the second quarter of 2011.

Consumers indicated that they were feeling much more confident about the employment situation, with that portion of the survey rising more than a point to 84.2.  However, consumers are worried about gas prices and the future of energy prices in general causing inflationary concerns.  These worries were shown in the expectations component dropping by over 2 points to 68.  Even with the worries about inflation, consumers and investors appear to remain positive.  Despite a dip when the sentiment index for March was released, the Dow Jones Industrial Average remained above 13,000, and the S&P 500 Index was over 1,400 at noon EDT on Friday March 16, 2012.

There are many things that will affect the outcome of the consumer sentiment.  A strong bull market will help to drive the number up, while a strong bear market will drive it down.  The recent jobless reports and unemployment reports that are giving off signals that the jobless situation is improving in the long term have been helping to keep the sentiment on the rise.  While political activity around the world has a small factor in sentiment, it is usually not a major player in how people feel.

The overall pattern of the sentiment index is important to investors.  A strong and steady increase in sentiment is an indicator that people feel better about the economy and will lead investors to spur on the bull market.  The bull market, in turn, will cause the sentiment to increase.  With consumer spending making up almost two thirds of economic growth, it is very important that people feel confident and continue to spend.  However, there is a fine balance between strong and steady economic growth and excessive growth.  Excessive growth will cause inflation, which will drive down consumer sentiment.

The Consumer Sentiment Index report comes out as a preliminary report in the middle of each month, and is finalized on the first of the following month.  As a survey of 500 households it is designed to measure consumer confidence.  The survey measures consumer opinions on economic outlook, job outlook, and other economic woes.  Survey takers can rank the categories as positive, negative, or neutral based on their feelings for the economic situation currently, and where they feel it will be in six months.  A normalized number of 100 would mean every household polled has an entirely positive outlook on the economy.


February Consumer Sentiment Index Shows Fears of...

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