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    Ask a Consumer, the Fall in Sentiment Makes Sense

    American consumer confidence ebbed in March even as stock indexes roared back from their February bottom, propelled by a worldwide spate of central bank liquidity.

    Overall consumer sentiment dropped to a five month low at 90.0 this month from 91.7 in February, missing the median forecast of 92.2.  It was the third straight decline following December's 92.6 and equaled last October’s low. Consumer sentiment had reached a post -recession high at 98.1 in January 2015.

    The index on current economic and personal financial conditions dropped to 105.6 in March from 106.8 previously, where it had been forecast to stay. Optimism over future conditions also slipped, falling to 80.0 from 81.9. It had been predicted to rise to 82.5.

    The fallen in confidence was largely among poorer families in both income and assets. 

    Families earning less than $75,000 voiced negative feeling in all three survey categories. The reading for overall sentiment dropped to 87.7 from 89.1, current conditions sank to 99.4 from 99.8 and expectations declined to 80.2 from 82.2.  

    Household making over $75,000 reported rising attitudes to questions in the sentiment and current conditions surveys --97.4 from 96.7, 117.4 from 115.8--and unchanged feeling under expectations--84.5.

    Families in the top third ordered by assets reported higher optimism in overall sentiment, current conditions and expectations. Those in the middle third noted more positive attitudes in general sentiment and current conditions with unchanged feeling about the future. Families in the bottom third by assets registered greater pessimism in all three categories.  

    Economist and analysts have been puzzled that the almost 40% drop in the price of gasoline from July 2015 to last month didn’t produce a burst of consumer spending. Instead Americans choose to conserve most of the difference, pushing the saving rate from 4.8 percent in June to 5.2 percent in January,  

    Gasoline prices rose sharply in the first two weeks of March when the survey was conducted. The nationwide average for a gallon of regular jumped 11 percent from $1.76 on February 29th to $1.96 on March 15th.

    But the reaction of U.S. households is quite logical. Consumption tends to rise when wages and salaries are moving higher as consumers have confidence the higher level of spending will be supported over time.  That has not been the case for the past seven years. 

    Average hourly earnings have averaged a 2.1 percent annual gain since the end of the recession in June 2009. That is roughly par with inflation for the period.  Though yearly earnings did rise from 2.0 percent last June to 2.6 percent in December, they have since fallen back to 2.2 percent in February.  

    Annual real weekly earnings, similar to above but corrected for inflation, dropped to just 0.6 percent in February from 1.1 percent in January. This measure of wage compensation has managed only a 0.4 percent annual gain in the last seven years.  These are not the wages of rising consumer spending.

    Gasoline price are volatile, and benefits in one period are likely to be paid for in the next.  

    Since averaging just over $4.09 a gallon in the second quarter roof 2008, fuel prices fell precipitously in the financial crisis to $1.62 just two quarters later.  The next year prices rose almost as sharply. In 2009 the price of a gallon of regular gasoline averaged $2.65, in 2010 $3.07, in 2011 $3.28, in 2012 $3.29, in 2013 $3.32, in 2014 $2.24, and in 2015 $1.99. So far this year the average price has been $1.974, with the lowest prices below $1.80 lasting less than two months.  

    The very sensible reaction to the extra income generated by a one or two month drop in fuel costs is to take in an extra dinner or movie, and save the rest. Prices will go back up.

    That is exactly what U.S. consumers have done.  It is, most likely, what economists and analysts did themselves. 

    Joseph Trevisani

    Chief Market Strategist

    WorldWideMarkets Online Trading

    Charts: Bloomberg

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