U.S. consumer sentiment took a turn for the worse in February and has been downbeat lately, sparking fears the recovery may lose momentum. The Index of Consumer Sentiment from the University of Michigan held steady at 73.6 in March, unchanged from February.
There is a strong historical correlation between the University of Michigan's sentiment index and the Conference Board's confidence index, and consumer spending—the biggest component of the U.S. economy. The two gauges are largely similar, though the Conference Board polls a larger number of consumers, has more questions about the labor market and tends to be more volatile. Both go back at least 40 years.
The "present conditions" component of the Conference Board's survey fell to a record low of 19.4 in February—not surprisingly, as the jobless rate held steady at 9.7%. February's 10-point dive in confidence, as measured by the Conference Board's survey, as well as softening in the Michigan index, was a tough pill for markets to swallow. That is why all eyes were on the University of Michigan's March results reported today. Consumer evaluations of their own personal financial situations have remained grim due to the expectation that job and income prospects show little signs of improvement.
There is a key question asked in the monthly U.S. consumer sentiment survey by the Institute of Social Research (ISR) at the University of Michigan: "One year from now will your financial situation be better, worse or about the same?"
The answer to this question determines the openness of the consumer to spend or save in the current economic climate and is an early warning signal toward where the economy is headed. If the consumer believes that his family's take home pay will steadily increase over the next year, the family will likely continue to spend.
"Closing the gap between consumers' expectations of the economy overall and their own personal financial situation will take longer in the past given that very small gains in jobs and incomes are anticipated in the balance of 2010," said Richard Curtin, Surveys of Consumers chief economist.
The Michigan Index's Consumer grim evaluation of their personal financial situation, along with the raising of interest rates due to huge government and consumer deficits, have preceded the U.S. Stock Market's downward slide in the past. Today, poor demand for U.S. Treasury notes is raising questions about whether interest rates will begin a march higher. Sharply lower demand for T-bills, especially from foreign investors, sent bonds' prices sharply lower and yields higher. It lifted the yield on the 10-year T-note to 3.9%--its highest since last June, and approaching the 4% mark that was pierced only briefly since the financial crisis in 2008.
Source: The Wall Street Journal, March 26, 2010
Understanding the Fed -- Not Just the Myths About the Fed
If you would like to understand more about how the U.S. Federal Reserve works, you can spend time on its website -- or you can get the real story. Elliott Wave International has collected eight of Robert Prechter's most trenchant articles about what the Fed actually does. He takes on the misleading myths about the Fed and explains what's really going on as he writes about these topics. Read more.