U.S. Consumer Sentiment Fell Throughout February

According to the University of Michigan, consumer sentiment fell throughout February, as indicated by a decline in the final month reading to 86.7 from the preliminary estimate of 87.4. Month to month, sentiment fell 4.9% and the decline outpaced Consensus expectations for decline to 87.5.

The m/m decline matched the Conference Board's report Tuesday that Consumer Confidence fell 4.8% (-2.6% y/y) during February.

Sentiment figures are not seasonally adjusted and 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.

The current conditions index deteriorated 1.9% late in February and fell 4.3% for the full period as the index of personal finances fell 5.1% (-7.4% y/y) and the reading of buying conditions for large household goods fell 3.6% (0.0% y/y). Consumers' assessment of gov't economic policy drooped 4.6% m/m (-10.8% y/y).

Consumer expectations held steady late in the month but for all of February were off 5.6% from January. The economic outlook deteriorated sharply with the index of expected business conditions during the next five years down 12.1% (-18.4% y/y) and the twelve month outlook off 8.6% (-15.8% y/y). Expectations for personal finances showed a m/m improvement of 1.7% (-3.9% y/y).

The mean expected inflation rate for the next twelve months was about stable m/m at 3.7%, still well below the 5.5% expected in October & September.

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.

Income Taxes: Who Pays and How Much? from the Federal Reserve Bank of St. Louis is available here.

GDP growth in the Euro-Zone slowed in Q4 to 0.3% from 0.7% in Q3, according to the first full breakdown of Q4 data published this morning by Eurostat. These real growth rates are quoted in chained 2000 euros, adopted as the pricing methodology by Eurostat just three months ago.

Several major expenditure components of GDP contributed to the lower growth; most notably, private consumption fell outright by 0.2% and was up a sluggish 0.8% from a year ago. This was among the smallest year-on-year increases in the 10-year history of the data calculated on this basis. However, as we noted here yesterday, retail trade, at least in Germany, turned up sharply in January; perhaps this is a precursor to a better performance for consumer spending in general this quarter.

Fixed capital formation moderated to a 0.8% gain in Q4 from 1.1% in Q3. This is still a respectable performance and brought the year to 2.2%, the strongest gain since the tech slowdown began in 2000.

Net exports decreased, encompassing smaller gains in both exports and imports. As with investment, though, the Q4 result followed much stronger outcomes in Q2 and Q3, so can hardly be characterized as "weak" in a broader context. Indeed, observers, including ourselves have noted repeatedly that the export sector is a main support to the European economies at present.

So 2005 ended at a slow pace in Europe. But as mentioned above, retail trade showed some life in Germany already in January, and sentiment surveys have also improved. The Olympics may even give some boost to this quarter's performance. The ECB policymakers must believe gains of that sort will take hold, as they raised their key interest rates yesterday for the second time in three months. M. Trichet's announcement in fact indicated a concern that recently improved economic activity would threaten inflation, which is already hovering above the desired 2% pace.