Monday Market Update: Consumer Sentiment Reaches 6-Month High

What factors impact this score?

It’s no secret that our actions and behaviors are driven by what we know and how we feel, and the link between consumer optimism and spending is no exception. Last week, the latest report from the Michigan Consumer Sentiment Index, the national measure of US consumer confidence levels, revealed the highest consumer sentiment index levels since April. The actual figure came in at 70.5, 1.5 points higher than economists at both The Wall Street Journal and Dow Jones Newswire predicted. But what does it all mean? 

Michigan Surveys of Consumers Director, Joanne Hsu, summarizes that “This month’s increase was primarily due to modest improvements in buying conditions for durables, in part due to easing interest rates.”

The Federal Reserve notably cut interest rates in mid-September, and economists have seen measurable signs of unexpected strength in the labor market, consumer spending and the broader economy. Jobless claims have fallen by 15,000, retail sales have risen by 0.4% and consumer inflation expectations are in line with pre-pandemic averages. The GDP (Gross Domestic Product) has risen from 1.4 in Q1 to 3% in Q2 to a projected 3.3% in Q3 as well. 

Analysts cite two additional possible reasons for the increase in consumer sentiment beyond rates. First of all, the coming election and political optimism for the party that projects they are going to win are likely playing a role. Second, there has been a change to methodology of the consumer sentiment index, as the University of Michigan has been gradually transitioning its collection of data methods from a phone survey to integrating online interviews. Some economists theorize that this change has resulted in a negativity bias in online responses, ‘potentially resulting from not interfacing with another human when taking the survey.’ Thus, while the 6-month high is notable, it may have been even higher if the drop in optimism had not occurred with the methodology change. 

Sources Used: Consumer Sentiment Hits Highest Levels Since April, Consumer Sentiment Hits 6-Month High, Exceeding Expectations

Have a great end to October!

Bobbi