The preliminary Michigan Consumer Sentiment Index (which gives a snapshot of consumer expectations regarding the overall economy) increased to 83.7 this month. This is up from 76.4 in April, and is the highest figure since July 2007.
This gain in consumer confidence shows that Americans are gradually overcoming the effects of federal spending cuts (known as sequestration) as well as the 2% increase in payroll taxes that kicked in at the start of the year. Additionally, a robust stock market, along with increasing home values, is creating a “wealth effect” among consumers – which normally results in increased optimism and spending on big ticket items.
Since the largest component of Gross Domestic Product (GDP) is consumer consumption, the sustained and continued resiliency in consumer confidence is critical to future GDP growth. In our view, the most important factor in sustaining consumer confidence is the continued improvement in the recovering labor and housing markets.
The U.S. Department of Labor recently reported that payrolls climbed in 30 states in the month of April, and the unemployment rate dropped in 40 states. Confidence among U.S. homebuilders is also increasing, reflecting improved sales trends and the strongest six-month sales outlook in more than six years.