The mid-month look at consumer sentiment shows only little improvement and some concerns over inflation. The Reuters/University of Michigan index edged only 3 tenths higher to 69.0. Expectations, which have been driving consumer measurements sharply higher for the last two months, actually fell back in this report, down 4 points to 65.4 for the first decline since February. But now the good news, the assessment of current conditions, which has been flat, jumped nearly 7 points to 74.5. When coming out of recessions, expectations typically lead current conditions as consumers look ahead to better times.
Inflation also typically appears when coming out of recessions. Both 1-year and 5-year inflation expectations rose, each now at 3.1 percent with the 1-year reading up 3 tenths and the 5-year up 2 tenths. This certainly reflects higher prices at the gas pump, but the increases shouldn't be dismissed since higher oil prices reflect expectations for rising demand and also, given government monetary stimulus, concern about dollar-based inflation.
Some may have been hoping for more acceleration in this report, and the dip in expectations offers a hint that the recovery may not be a robust one. But that may be jumping to conclusions. After all, the jobs market, though improving, is still very tough with a record number of unemployed on jobless benefits. The Conference Board's report at month-end includes closely watched details on the assessment of the labor market. Stocks fell slightly in immediate reaction to today's report with demand rising slightly for the safety of Treasuries.
Market Consensus before announcement
The Reuter's/University of Michigan's Consumer sentiment index jumped sharply in May to 68.7, up more than 3-1/2 points from April. Improvement was evenly split between the report's two components: the assessment of current conditions and the assessment of future conditions. Looking ahead, an easing contraction in jobless claims and gains in the stock market could keep sentiment on the upswing. But higher gasoline prices could dampen consumer spirits.