A quick look at a timely topic of interest – with a brief review of why it could matter to investors.

Chart of the Week

January 26, 2015

Jumping confidence, it's a gas, gas, gas
Consumer sentiment and US gasoline prices

chart

Source: Bloomberg, as of 1/20/2015. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges.Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The bottom line:

  • With prices prominently displayed at the pump, drivers are vividly aware of the savings they're enjoying on gasoline so it's easy to see why consumer confidence has leaped since oil prices began falling last summer.
  • Indeed, popular measures of consumer confidence have recently surged to above-average levels for the first time in this recovery; the same holds true for small business optimism.¹
  • Yet optimism had already been in a slow upward climb even before it received a shot-in-the-arm at filling stations.
  • That in itself was an accomplishment. Many fail to appreciate just how costly energy prices have been for much of the last decade and their impact on confidence. Indeed, they have arguably contributed to the weakest economic recovery in the post WWII era.
  • If energy prices do settle at a lower level for an extended period, then confidence could remain at higher levels—barring any countervailing developments.
  • What might this mean for the economy? The recent jump in confidence may or may not generate a notable increase in consumption. Consumer spending actually held up relatively well amid the depressed confidence of recent years.
  • Yet, it does seem logical that a less pessimistic view of the future could encourage borrowing, lending and broader deployment of underutilized capital – both human and financial. All have yet to fully recover, but all are ingredients of stronger economic growth.

The chart:

  • The chart shows the University of Michigan Consumer Sentiment Index and the average price of unleaded gasoline on a monthly basis over the past 10 years.

¹ The preliminary release of the University of Michigan Consumer Sentiment Index for January 2015 was 98.2, up 15.7 points from 82.5 in June 2014; that marks the highest monthly reading since January 2004; the three-month average of 93.5 is the highest since January 2007. The long-term average of the index is 85.1; the long-term median is 88.3. The Conference Board's Consumer Confidence Index was 92.6 in December 2014 (latest available), up 6.2 points from June 2014; while this confidence gauge as actually higher in October 2014 than in December 2014, the three-month average of 92.6 is the highest since November 2007. The long-term average is 92.4; the long-term median is 94.8. The National Federation of Independent Business (NFIB) Small Business Optimism Index was 100.4 for December, up 5.4 points from 95 in June 2014; that marks the highest since October 2006. The 3-month average of 98.2 is the best since January 2007. The long-term average is 97.9; long-term median is 99.5.


Definitions:

The University of Michigan Consumer Sentiment Index is a consumer confidence index published monthly by the University of Michigan and Thomson Reuters. The index is normalized to have a value of 100 in December 1964. Each month at least 500 telephone interviews are conducted of a continental United States sample (Alaska and Hawaii are excluded). Fifty core questions are asked.

The NFIB Small Business Optimism Index is produced by the National Federation of Independent Business from data compiled in its monthly survey on small business owners that belong to the NFIB.

The National Federation of Independent Business (NFIB) is a US small business advocacy association, representing 350,000 small and independent business owners.

The Conference Board Consumer Confidence Index is a barometer of the health of the U.S. economy from the perspective of the consumer. The index is based on consumers' perceptions of current business and employment conditions, as well as their expectations for six months hence regarding business conditions, employment, and income. The Consumer Confidence Index and its related series are among the earliest sets of economic indicators available each month and are closely watched as leading indicators for the U.S. economy.

The Conference Board is a US-based business membership and research association.


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