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Economy in Brief

U.S. Consumer Sentiment Fell on Diminished Expectations
by Tom Moeller December 8, 2006

The University of Michigan's preliminary reading of consumer sentiment this month fell 2.1% from November to 90.2. The decline followed a 1.6% November drop and compared to Consensus expectations for a slight increase to 92.5.

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 and during those ten years sentiment has a 68% correlation with the change in nonfarm payrolls.

Diminished consumer expectations for the economy dragged the December figure down with a 5.5% decline after a 1.9% November shortfall. Business conditions during the next twelve months led that decline with a 13.4% (-6.7% y/y) drop while long term expected business conditions also fell as did expected personal finances.

The reading of current economic conditions actually rose 2.1% and reversed the 1.2% November drop. Perceived buying conditions for large household goods led that m/m increase (-1.2% y/y) but the sense of current personal finances fell (-0.8% y/y).

Expected inflation during the next year increased to 3.5% and for the next five years expected inflation ticked up to 3.6%. Since 1980 there has been an inverse 63% correlation between the level of sentiment and expected inflation during the next year.

Consumers' opinion about gov't economic policy sagged miserably to an index reading of 86 and reversed all of November's increase.

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.

University of Michigan December (Prelim. November Y/Y 2006 2005 2004
Consumer Sentiment 90.2 92.1 -1.4% 87.2 88.6 95.2
   Current Conditions 108.2 106.0 -0.8% 105.1 105.9 105.6
   Expectations 78.6 83.2 -2.0% 75.7 77.4 88.5
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