Consumer sentiment rose sharply to 70.2 in August in the U of M consumer sentiment preliminary report. The month’s rise in sentiment was the 42nd largest monthly rise out of the last 380 monthly changes. It was the fourth largest monthly rise in the index in this recession/recovery period. The current index rose sharply making the second highest jump in this cycle. Expectations rose by 4.2 points marking a solid rise that is the sixth largest gain for expectations in this cycle. The move in August preliminary report is led by the substantial gain in the current situation.

Still in terms of cycle levels the current situation is weak standing at the 38Th percentile of its recession cycle range, while expectations are just off their cycle peak reading of 70.8 (June 2009).

Both expectations and the current situation are some 30% shy of their respective past cycle peaks. Still the day’s report represents a sharp gain from the cycle lows and builds some well-needed momentum into this report after a period of being mired below peak and sinking.

The consumer remains the key to this economic recovery since there will be no investment of note until consumer spending picks up. Exports which are doing well are simply too small to lead recovery. Dropping imports are fools gold for growth since they only drop if domestic demand is weak and that is the road to perdition not to crisis contrition.

Near term we look, not inventory building, but to less cutting to boost GDP growth. But that will not spur growth unless final sales pick up requiring more restocking and spurring new rounds of hiring. The consumer sentiment report may not dictate consumer spending month-by-month. But the broad sweep of consumer moods do set the stage for and reflect true changes in consumer spending habits.

In the month consumers have seen their personal finance situation improve and the buying conditions are said to be the best in three months and better than anything 15 months before that. It is an important rise in this assessment. Importantly, expected business conditions in the next 12 months are the best in 24 months.

This is a good solid report. As the back-to-school season kicks in, the month of September is a key one for assessing how well the economy is mending. So far it looks good.