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As we pointed out this week, consumer confidence has been improving largely due to steadily improving expectations.  The University of Michigan Consumer Sentiment numbers suggest that expectations may be correcting here, as the reality of still-anemic economic growth and higher food and gas prices hit home.

EXPECTATIONS – THE ROOT OF ALL HEARTACHE - optimism

Earlier today, the preliminary University of Michigan Consumer Sentiment index fell to 68.2 from February’s 77.5 (the decline was the eighth largest since the index began being conducted monthly in 1978).  Not surprisingly, the decline was likely caused by recent geo-political events and soaring gasoline prices.  Importantly, the bulk of the decline came from plunging expectations, which fell 13.3 points from February to 58.3.  Notably, Inflation expectations surged, especially short-term expectations, which jumped more than a percentage point to 4.6%.

In general, economic drivers of confidence remain very mixed; rising gas prices and geo-political events are depressing sentiment, while stock prices and the labor market are a net positive.  We recently speculated that we could see an intermediate term bottom in the unemployment rate, as a large number of discouraged workers remain out of the labor force, but are likely to start looking as the economy improves.  Another coming drag on confidence and spending is the necessary-but-significant austerity measures being adopted at both state and national level.  The housing market, which is now in a double-dip (See our Financial team’s post, “DOUBLE-DIP IN HOME PRICES…” from yesterday for more), is an additional drag that the market seems to have paid scant attention to of late.  This housing scenario is playing out in an ugly fashion and when – not if – the market has no option but to pay heed to this, it will be a significant depressant for confidence.

The outlook for confidence is suddenly less optimistic and I believe there are plenty of catalysts ahead that may further pull expectations, and sentiment, down.

Howard Penney

Managing Director

EXPECTATIONS – THE ROOT OF ALL HEARTACHE - umich exp 311