American Consumer Sentiment Rises Despite Net Worth Pinch
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American consumers are the most confident in their purchasing power since January 2007, thanks to falling oil prices and an improving domestic job market.
On a backdrop of falling bond yields, deflationary risks, and falling stock prices, American consumers are feeling decidedly upbeat. The Thomson Reuters and University of Michigan preliminary December Consumer Sentiment index rose to 93.8, up 5.6% from the prior month and above economists’ expectations. Falling gasoline prices and unemployment claims, which are at their lowest since 2000, are helping Americans spend more.
American consumers are the most confident in their purchasing power since January 2007, thanks to falling oil prices and an improving domestic job market.
On a backdrop of falling bond yields, deflationary risks, and falling stock prices, American consumers are feeling decidedly upbeat. The Thomson Reuters and University of Michigan preliminary December Consumer Sentiment index rose to 93.8, up 5.6% from the prior month and above economists’ expectations. Falling gasoline prices and unemployment claims, which are at their lowest since 2000, are helping Americans spend more.
The confidence is in contrast to data from the Federal Reserve indicating that Americans were worth slightly less in the third quarter than they were in the second quarter. According to the Fed, “the net worth of households and nonprofits dipped slightly to $81.3 trillion during the third quarter of 2014. The value of directly and indirectly held corporate equities decreased $0.7 trillion and the value of real estate rose $245 billion.” Despite the $700 billion fall, Americans are still near their all-time high in total wealth.
Despite the fall, liquid wealth rose. This may be a leading indicator of greater spending. Household wealth in liquid financial instruments, including money market fund shares and bank deposits, rose to $10.1 trillion from $9.9 trillion the previous quarter. Meanwhile, holdings in corporate equities fell to $12.9 trillion, from $13.4 trillion the previous quarter.
Gas Prices, Purchasing Power
A main driver of consumer confidence is falling energy costs, as WTI oil futures fell below $60 per barrel with further declines expected. According to Gas Buddy, the average price per gallon has fallen to $2.60, down over 29% in the last six months. Heating oil prices are also on the decline.
Since the United States is a net importer of oil, the falling energy costs are benefitting average consumers. However, investors have not cheered the news as much as average Americans, as concerns that a cascade effect from cheap oil could trigger debt defaults in the U.S. and global unrest in next exporter countries.
Dovish Fed Expected on Deflation Fears
Improving conditions for American consumers are not necessarily causing enthusiasm on Wall Street, as stocks saw steep declines at the end of the week regardless of growing consumer confidence and falling unemployment.
Much of the equity declines are from fears that the developed world might be facing a deflationary spiral. Bill Gross, former PIMCO CEO and current fund manager at Janus Capital Management, said in an interview late last week that the falling price of oil was going to force the Federal Reserve into a more dovish monetary stance. “It moves towards a dovish stance relative to what the market expected a few days ago,” Gross said in an interview with Bloomberg Television.
U.S. Treasuries also signaled downbeat inflation expectations, as the 10-year Treasury fell to 2.10%. The note is down over 10% in just two months.
