Is Consumer Sentiment On the Rise?

The index of consumer sentiment compiled by Thomson Reuters and the University of Michigan unexpectedly rose in January, an important boost for the U.S. economy as consumer spending is a big portion of gross domestic product.

This measure of confidence among American households increased to 73.8 last month from December’s reading of 72.9. Economist polled by Bloomberg had predicted the gauge to drop to 71.5.

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Consumer sentiment, a measure of Americans’ current ability or willingness to make purchases, was pushed up by falling gasoline prices and rising home prices. However, The Conference’s board’s reading of consumer confidence showed that people are increasingly pessimistic about their personal finances and job prospects in the future. Earlier this week, the board reported that its gauge fell to 59.5, the lowest reading since October 2011. While both surveys assess consumers’ view of their personal finances, they look at different time frames. The University of Michigan’s survey measures whether Americans think now is a good time to make big investments, and The Conference Board looks at expectations six months from now…
A big factor affecting how Americans see the future is the uncertainty surrounding fiscal policy. Consumers are waiting to see if Congress is able to work out an agreement to avert the spending cuts that were deferred until March. Their personal finances also took hit at the beginning of the year, when lawmakers ended the payroll tax holiday, which allowed the tax that funds Social Security to revert back to 6.2 percent from 4.2 percent. Bloomberg reported that this hike could have a negative effect on spending in the next few months. Friday’s jobs report from the Labor Department, which showed that the unemployment rate increased, could fuel concerns as well.

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But the increase in consumer sentiment has positive indications for the future. “Wealth is rising again,” High Frequency Economics’ chief U.S. economist Jim O’Sullivan told the publication. “I think the backdrop in general for consumer spending is improving.”

Here’s how the Dow, S&P and Nasdaq have each performed so far in 2013:

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