US Consumer Sentiment Slips

The University of Michigan Consumer Sentiment index slipped to 66.0 in July from 70.8 in June, but was revised up from its preliminary reading of 64.6. The reading was slightly better than expected.

The index has two major components: the expectations about how the economy will look in the future, and the state of the economy currently. Relative to June, both sides fell fairly sharply, but remain well above the lows seen last winter. Consumers’ perceptions about the future dropped to a reading of 63.2 from 69.2 in June, and are almost back to the 63.1 reading in April (but that was a huge improvement over March’s reading of 53.5).

The perception of the current state of the economy also slipped, falling to 70.5 from June’s 73.2. However, it remains above the readings last spring (even as recent as May’s 67.7 reading). While relative to June, the expectations component was the culprit, it was also the reason for the improvement versus the preliminary reading for July, rising by 2.3 points while the current conditions part rose only 0.1 point.

Consumer sentiment is often greatly influenced by two factors: gasoline prices and how well the stock market is doing. So the decline from June is a little bit surprising given that gas prices are down and the market is up (although that could explain the improvement from the preliminary number).

I have never put much stock in these numbers, even though Consumer Confidence (to be released next week by the Conference Board, and usually very similar to the University of Michigan data) is one of the items in the leading economic indicators. The numbers are of very limited utility from a market perspective. Still, the reversal after several months of improvement in the overall index is a little disconcerting, especially in the face of lower gasoline prices and higher stock prices. It means that consumers plan to keep their wallets shut pretty tight (but they do not always act the way they say they will).

This is not good for more discretionary parts of the economy. Mid-range retailers like Macy’s (M) and J.C. Penny’s (JCP) would seem to me to be particularly vulnerable as the carriage trade caters to those that have money to spare, regardless of the state of the economy. Discounters like Family Dollar (FDO) and Big Lots (BIG) can benefit from former J.C. Penny customers trading down in a tough economy. However, it is not something to put a lot of weight on.

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