Bloomberg News

U.S. Michigan Consumer Sentiment Increase May Boost Spending

February 01, 2013

Confidence among American households unexpectedly rose last month in a possible benefit to consumer spending, the largest part of the economy.

The Thomson Reuters/University of Michigan index of consumer sentiment climbed to 73.8 in January from 72.9 in December. The gauge was projected to drop to 71.5, according to the median forecast of 62 economists surveyed by Bloomberg. It compared with a preliminary reading of 71.3.

While consumers are watching to see if Congress will be able to reach an agreement to avert across-the-board spending cuts, the Labor Department said today payrolls increased 157,000 jobs last month. Falling gasoline prices and rising property values may also be helping to compensate for the smaller paychecks workers are receiving due to a two percentage-point increase in payroll taxes.

“Wealth is rising again,” Jim O’Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York, before the confidence report was issued. “I think the backdrop in general for consumer spending is improving.”

Estimates for the confidence measure ranged from 69 to 74, according to the Bloomberg survey. The index averaged 64.2 during the recession ended in June 2009, and 89 in the five years prior to the 18-month slump.

Current Conditions

The Michigan survey’s current condition index, which measures whether Americans think it’s a good time to make big investments and assesses consumers’ view of their personal finances, fell to 85 in January from 87 in the prior month. The preliminary reading was 84.8 for January.

The index of expectations six months from now, which more closely projects the direction of consumer spending, rose to 66.6 in January from 63.8 the month before.

Consumers in today’s confidence report said they expect an inflation rate of 3.3 percent over the next 12 months, compared with 3.2 percent in December. Over the next five years, Americans expected a 2.9 percent rate of inflation, unchanged from December.

In a separate report released yesterday, Bloomberg’s weekly Consumer Comfort Index dropped to a three-month low of minus 37.5 for the period ended Jan. 27 from a prior-week reading of minus 36.4.

Conference Board

The Conference Board’s index of confidence among U.S. consumers decreased to 58.6 in January, the weakest since November 2011, after a revised 66.7 in December, the group reported Jan. 29.

Consumers are benefiting as low mortgage rates drive a housing recovery and property values increase. For all of 2012, homebuilding climbed 11.9 percent, its best showing since 1992, the Commerce Department reported this week.

Household purchases, which account for about 70 percent of the economy, climbed in December as incomes grew by the most in eight years, a Commerce Department report showed yesterday. Buying rose 0.2 percent after a 0.4 percent gain in the prior month. Still, spending could take a hit from the higher payroll tax.

Congress allowed the tax that funds Social Security to revert to 6.2 percent from 4.2 percent starting in January. That puts the levy at its 2010 level and will cost someone who earns $50,000 annually an extra $83 a month.

While the auto manufacturing industry has been a bright spot in the economy, Monro Muffler Brake Inc. (MNRO:US) President John W. van Heel said in a Jan. 29 earnings call the automotive repair and tire service chain operator believes the aging U.S. car fleet will keep driving his company’s business moving forward, particularly when consumers consider the cost of a new car.

More Pessimistic

“I’m probably more pessimistic about the economy and the consumer than most other retailers and believe that the consumer is in much worse shape than most,” he said. That’s evident in “deteriorating” consumer sentiment, he said, and “certainly won’t be helped in coming months as people begin to adjust to less disposable income due to higher taxes.”

Still, consumers have benefited from rising home values and cheaper fuel prices. A gallon of regular gasoline at the pump averaged $3.46 nationally yesterday, down from a recent high of $3.87 in September, according to AAA, the biggest U.S. motoring group.

To contact the reporter on this story: Jeanna Smialek in Washington at jsmialek1@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net


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