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Consumers Cheered Up a Bit in Early January

Reuters
Friday, 18 Jan 2008 | 10:05 AM ET

U.S. consumers' mood brightened a bit in January, defying expectations driven by the constant drumbeat of talk about a possible recession, weak jobs market and falling stock prices.

At the same time, another report released on Friday showed leading economic indicators for December continued to weaken, suggesting growth will remain sluggish for some time to come.

The reports came at a time when the U.S. central bank is expected to slash interest rates and the White House is crafting a fiscal stimulus package to shore up an economy that many fear is headed into a recession.

"There's a ray of hope in the consumer sentiment figure which inched its way back up in early January," said Cary Leahey, economist at Decision Economics in New York.

The promise of fiscal measures and interest rate cuts from the Federal Reserve could counter some of the gloom created by recent stock market losses, said Leahey.

The Reuters/University of Michigan consumer confidence reading for January was 80.5, well above the Wall Street consensus of 74.5. The reading rose from 75.5 in December, which was the weakest level since October 2005, right after Hurricane Katrina.

Assessments of current conditions came in surprisingly rosy at 98.1, up from 91.0 and the highest since August. The expectations measure was 69.1, up from 65.6.

Still, consumers took a negative view toward their current finances, shell-shocked as year-end statements on retirement savings accounts and brokerage accounts started to flood their
mailboxes.

The University of Michigan said that the data was consistent with personal spending growth of a modest 2 percent in 2008 -- hardly suggesting boom times ahead.

"Consumers are very cautious. I don't see the improved sentiment reading as heralding a big consumer spending turnaround," said Josh Stiles, strategist at IDEAglobal in New York.

In recent years consumer sentiment has not correlated well with retail spending, since many Americans apparently have been prepared to spend their way through good times and bad.

Still, the negative "wealth effect" of declining equities prices, weak residential real estate and constant pain at the gasoline pump has suggested that consumers are finally on the verge of buckling.

In a speech about the economy on Thursday, the president of the Cleveland Federal Reserve Bank, Sandra Pianalto, tied a recent slowing in consumer spending to reduced household
wealth.

Some economists still expect consumer spending, which makes up about 70 percent of U.S. gross domestic product, to decline over the next few quarters.

"With the markets still in disarray consumers' confidence cannot stage a sustainable rebound," said Ian Shepherdson, chief U.S. economist with High Frequency Economics in New York.
"Indeed, stock prices are a key leading indicator of sentiment, and the latest declines will hit the data next month."

Meanwhile, the Conference Board's leading economic indicators report for December fell 0.2 percent, its third consecutive decline.

"Consumption and investment have weakened and even export growth, the remaining source of strength, has cooled," said Ken Goldstein, Conference Board economist.

The New York-based private group's index measures 10 factors, from initial jobless claims to stock prices to building permits, to project future economic activity.

"The signal from the survey is not yet unambiguous, but it is getting close. The risk of outright recession is rising sharply; very slow growth is the unappealing alternative," said Shepherdson of High Frequency Economics.

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