More Headline Amusement: Consumer Sentiment Surges

Yesterday, we were told Fearful Investors Lost Faith in Trump.

Today, Bloomberg tells us Surge in Expectations Drives Gain in U.S. Consumer Sentiment.

Consumer sentiment climbed in August to a seven-month high as a measure of the outlook for the U.S. economy and personal finances registered the largest one-month advance since the end of 2011, according to University of Michigan survey data released Friday.

Consumer sentiment has recovered following a two-month slide as President Donald Trump’s legislative agenda ran into several roadblocks.

Highlights

• Sentiment index rose to 97.6 (est. 94) from 93.4 in July
• Expectations measure jumped to 89 from 80.5 the prior month
• 8.5 point increase in consumer expectations biggest since December 2011
• Current conditions gauge, which measures Americans’ perceptions of their finances, fell to 111 from 113.4

Key Statement

“The precautionary mood of consumers had required price discounts and low interest rates to offset their economic uncertainties, now consumers are more likely to base their spending decisions on a renewed confidence in their jobs and incomes,” Richard Curtin, director of the University of Michigan consumer survey, said in a statement.

OK Let’s Ask Consumers

Instead of asking consumers how they feel, why not ask them what they expect to do? Oh, wait, the Fed just did that.

Consumer Spending Expectations Down Again

On August 14, I wrote Consumer Spending Expectations Down Again: Dear Fed, Why Don’t You Believe Your Own Survey?

Household Spending Projections

Household Income Projections

Projection Comments

• Income projections are volatile but at least they are trending higher across the board.
• Spending projections are less volatile and trending lower at every level.
• At the 25th percentile level, a group that no doubt spends every cent they make, spending expectations are zero. Those projections were in negative territory in April.
• Fed Chair Janet Yellen does not believe the Fed’s own reports. Instead, she relies on consumer confidence numbers that tend to track the stock market or gasoline prices more than anything else.

Perhaps New York Fed President William Dudley does believe in the report.

Earlier I commented NY Fed President Wants Consumers to Tap Home Equity: Didn’t We Try That Before?

Consumer Sentiment Nonsense

• Economists do not believe what consumers say they will spend. Instead, they ask consumers how they feel.
• Economists believe how consumers feel in the future will impact what they spend in the future.
• Of course, how consumers expect to feel six months, likely has little bearing on how they will really feel six months from now.

Inflation Expectation Nonsense

Economists also believe in inflation expectations. The theory is that consumers will rush out and buy things now if they expect prices will rise.

In reality, the most that can happen is a small bit of demand shifting. If you need a washing machine, you buy one. You don’t buy two of them because you think prices will go up. Nor will you buy one if you do not need one.

You may not even know you need a washing machine until it breaks. When it does break, you will get one. You won’t wait a month if you think prices are likely to drop.

Consider food and gas. Whether or not you think food or will go up in price, you can only buy as much food as you have storage space, and you can only buy as much gas as will fit in your car tank.

If you need a coat, you will buy one, if you can afford one. If you know there is a coat sale coming up next week, you wait a week.

If coats get cheap enough on sale, you may buy a second one in a different style. Bargain buying behavior is the opposite of what the economists expect.

Finally, consider electronics. Prices constantly drop and quality constantly rises. Under Fed theory, no one would buy electronics knowing full well they could get the item in the future at a cheaper price.

Nonsensical statements from the Fed came out again in the July FOMC minutes. Here is the statement: “Participants agreed that a fall in longer-term inflation expectations would be undesirable, but they differed in their assessments of whether inflation expectations were well anchored.”