Consumers See Some Light

Consumer sentiment improves

They say it's darkest before dawn, and the unemployment rate has been rocketing higher and many of us feel uncertain about our jobs. The economy still faces many hurdles, including banks that are bogged down by bad loans, out-sized risk premiums in the money markets (LIBOR rates are still too high), and headlines continue to chronicle the major layoffs in the US and abroad.

But the latest reading from the University of Michigan's survey on consumer sentiment shows that some of us are starting to see the first signs of dawn in what has been a dark recession.

Consumer sentiment rose a larger-than-forecast 4.6 points in April to 61.9, it's highest reading in over six months. Why is this important? Because consumer spending accounts for over two-thirds of economic output. And if consumers are starting to feel better and perceive the economy may be approaching a bottom, it's more likely they will contemplate making discretionary purchases that can stabilize economic activity. When that starts to happen, corporate cutbacks will likely abate, production cuts should dissipate, and the business cycles will begin anew.

Reasons for this budding optimism include mortgage rates that are near or at historic lows, monetary stimulus that continues unabated, bargains designed to attract cautious buyers (who doesn't like a good deal!), and with all of its detractors, the government is set to pump hundreds of billions of dollars into the economy.

Before we get carried away with rampant optimism, the level of confidence remains mired in a range we have seen for much of the recession, but at least the trend is in the right direction. Interestingly, with all of the deflation talk that's been in the air, inflation expectations rose, likely owing to gasoline prices that are now hovering near $2 per gallon.