Today we took two steps back, one step forward in terms of the economic data. The step forward is a very solid increase in the U of Michigan consumer sentiment survey. The steps back were the reports on new goods for Durable Goods and New Home Sales.
The consumer sentiment index rose to 73.5 in September from 65.7 in August and was well above expectations of 70.3. This is the highest reading in two years.
The index has two sub-components — current conditions and expectations about the next year. The current conditions index rose to 73.4 from 66.6 in August and the six-month forward expectations jumped to 73.5 in September from 65.0 in August.
Clearly consumers are getting more optimistic. They are thus more likely to open up their wallets, although they may be constrained in doing so due to the high rate of unemployment and slow increases in incomes.
Consumers seem to agree with the Fed that inflation is not an immediate problem — expectations for inflation over the next year fell to 2.2% from 2.8% in August. I expect that most of the inflation we will see over the next year will be in the headline numbers, not in the core.
With last year’s plunge in oil prices about to anniversary, year-over-year inflation in energy is set to surge. However, with unemployment as high as it is, nobody is going to be walking into their boss’ office and demanding a raise. Thus there will be no pressure on wages, and the wage side of a wage price spiral will have no traction at all. All that inflation will do is lower the real standards of living for the vast majority of people.
Money is, of course, the fuel for inflation, and while narrow measures of money rose at unprecedented rates earlier in the year in response to the financial meltdown, broader measures of money have actually been starting to fall. If anything, consumers may be too pessimistic about the inflation outlook, especially with regards to anything with the exception of energy prices.
The bond market is certainly not expecting any near-term inflation, with two year T-notes now yielding just 0.96%. If anything, it is expecting overall prices to fall — not rise — over the next two years.
Still, more than 9 in 10 Americans who want jobs have them (although many of those are working far fewer hours than they would like). If those with jobs are more willing to spend, that should mean that retail sales and overall aggregate demand will pick up, and we might just start to turn the corner on job losses.
In other words, the vicious cycle we have been in could turn into a virtuous cycle. It certainly is good news for the retailers. However, I suspect that when consumers do go out to shop they will continue to be very price-conscious and favor discounters like T.J. Maxx (TJX) and Family Dollar (FDO) over traditional department stores like Macy’s (M) or the non-anchor mall stores like Abercrombie & Fitch (ANF).
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Read the full analyst report on “ANF”
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