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Economy in Brief

U.S. Consumer Sentiment Fell: Inflation Expectations Surged
by Tom Moeller May 12, 2006

Consumer sentiment fell hard early this month. The preliminary May reading from the University of Michigan dropped 9.6% m/m to 79.0, the lowest level since last October. Consensus expectations had been for a far lesser decline to 86.8. During the last ten years there has been a 76% correlation between the level of consumer sentiment and the y/y change in real consumer spending.

Expectations for the economy dropped 7.4% on top of a 3.3% April decline. Higher gasoline prices probably were behind the jump in the twelve month mean expected inflation rate to 4.8% from 4.4% last month, its highest level since October. That dragged down expectations for personal finances as well as expected business conditions.

The current conditions index also suffered and fell 11.9% m/m. The current index of personal finances dropped 16.0% (-8.3% y/y) and the reading of buying conditions for large household goods fell 9.7% (-8.6% y/y). Consumers' assessment of gov't economic policy cratered 8.3% m/m (-10.5% y/y).

The University of Michigan survey is not seasonally adjusted.The mid-month survey is based on telephone interviews with 250 households nationwide on personal finances and business and buying conditions. The survey is expanded to a total of 500 interviews at month end.

Household energy expenditures, 1982-2005 from the Federal Reserve Bank of Chicago is available here.

University of Michigan May (prelim. April Y/Y 2005 2004 2003
Consumer Sentiment 79.0 87.4 -9.1% 88.6 95.2 87.6
   Current Conditions 96.2 109.2 -8.3% 105.9 105.6 97.2
   Expectations 68.0 73.4 -9.7% 77.4 88.5 81.4
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