What is Consumer Sentiment, the “Michigan Sentiment Survey” really? Balas makes a compelling argument about consumer sentiment predicting “truth for the future.” Here’s an excerpt from his cogent argement publish at realmoney.thestreet.com over the weekend:
The Predictive Power of Consumer Sentiment
Gene Balas
| Feb 10, 2012 | 4:00 PM EST
.……………I have long lamented the lack of income growth in payroll reports, and consumers have taken notice, too. When you couple the fact that consumers’ wealth — in both housing and financial assets — had taken a beating up to and during the recession, it’s no surprise that spending fell in tandem and has been restrained ever since. And it isn’t just income growth expectations — inflation expectations and household wealth matter, too.
Recall what happened before the Great Recession. Real incomes were already stagnant since the recession of the early 2000s, leading to modest income growth expectations prior to 2007. Then there was the oil spike, leading to very high gas prices. That sent inflation expectations soaring. It didn’t matter that the actual inflation rate after the oil price spike had receded; the damage had already been done. Real income expectations (coupling already low nominal wage growth with substantially higher inflation expectations) had fallen sharply. The researchers determined that real income growth expectations do matter and they correspond with future spending trends….………..
http://realmoney.thestreet.com/articles/02/10/2012/predictive-power-consumer-sentiment
………………….So what should we expect from consumer expectations? Rising stock prices in recent periods have helped (although housing prices have continued to fall), but the research shows that asset values account for about a third of the gap between actual consumption and its longer-term trend, with real income expectations accounting for the rest. Thus, rising stock market wealth (the S&P 500 has gained 7.5% so far this year) can offset some of the lower income expectations. Based on the researchers’ conclusions, their outlook is for very modest growth in consumer spending, at just 0.1% from the third quarter of 2011 to the third quarter of 2012.