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U.S. Consumer Sentiment Fades, but Remains near the Best in a Decade

U.S. Consumer Sentiment Fades

Confidence among American consumers slipped for a second month in August as turmoil in the equity markets and an incipient interest rate hike may be beginning to weigh on optimism, but the overall outlook remained near the highest in a decade.

The University of Michigan preliminary sentiment index dropped to 92.9 from 93.1 in July according to today's release, just missing the 93.5 forecast from the Bloomberg survey of economists. 

While consumer confidence has declined from January's eleven and a half year high of 98.1, it remains well above the 77.2 average of the past ten years and the 94.4 average so far this year is the best since 2004. 

Basic to the strong consumer confidence number is probably the steady if not spectacular performance of the labor market which has created more employment in the past two years than at any time since 2000. Layoffs are low and the weekly filings for initial unemployment claims have been below 300,000 since March an historical indicator of a robust job market.

Gasoline prices are also helping. They have declined five percent in the past two months and are set to go considerably lower as the 30 percent plunge in crude oil prices since June filters through to the filling stations. Unlike the brief January low in gas prices that did not translate into an uptick in consumer spending this decline appears more durable.

The survey’s measure of consumer expectations in six months dipped to 83.8 from 84.1 in July on a forecast of 85.0. The gauge of current conditions was little changed at 107.1 in August from 107.2 the prior month and higher than the 106.5 median prediction. As with the overall sentiment measurement, both remain near their decade highs, 91.5 for expectations and 109.3 for current conditions, each in January. 

American equities peaked in the late Spring and Summer, the Dow and S&P 500 in May, and the Nasdaq in July  and have subsequently  been subject to the kind of volatility that can be unsettling to investors though the  total declines to date are well under the  10 percent traditional correction level.  

The Federal Reserve is expected to raise its benchmark Fed Funds rate next month for the first time in eight years, which could raise consumer interest expenses from credit cards to mortgages. 

Though wage gains have not matched pre-recession levels, they have been providing reliable if modest additional income. Average hourly earnings rose 2.1 percent in July from a year earlier, matching the average since the end of the recession in June 2009.

Personal income saw a 4.1 percent annual rise June, a bit better than the 3.4 percent post-recession average but on par with the 4.4 percent increase in the past year and a half. 

Almost half of the survey's respondents, 47 percent, said that their current financial situation had improved, one point shy of the best level since the end of the recession. Four out of every 10 households said rising income was the most important element in strengthening their finances, the most since 2000.

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

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