Friday, December 7, 2007

Consumer Sentiment Continues to Deteriorate

The University of Michigan Consumer Confidence Index dropped again in early December, falling to 74.5 (consensus 75) from 76.1 in November. The index has now fallen to the lowest level since October 2005, where it tanked at 74.2 after Hurricane Katrina. Other than the brief dip in 2005, the index hasn't been this low since the early 90s.

The drop was due to a further deterioration in the economic outlook, falling for 66.2 in November (versus a summer peak of 81.5 in July) to 63.2 in the preliminary December survey. Current conditions actually recovered slightly to 92.1 from 91.5 last month. Current conditions peaked at 105.1 last May.

Inflation expectations rose back to their highest levels of the past two years. The one year outlook increased to 3.5% from 3.4% last month, and five year expectations rose from 2.9% to 3.1%. This data reinforces the Fed's concerns about inflation, and will make it harder for the Fed to cut rates more than 25bp next week.

Consumer spending will be watched carefully in light of this data.

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