Consumer sentiment dropped last month. Looking at the chart we see two patterns.
1.) There were four months of increases before the drop, indicating the overall trend is still up (nothing goes up forever). However,
2.) Sentiment has had a difficult time getting above the 70 level. It hit that level last September but fell hard in the 4th quarter. The fall was triggered by Lehman crisis and the following liquidity crisis.
This marks an interest divergence in a larger overall trend. Notice the following charts from Pollster.com
The getting better/getting worse numbers are now moving in the wrong direction for a recovery. In addition,
The number of people who think the economy is poor is increasing apparently at the expense at the number of people who think the economy is fair.
There are two interesting points to make. On all the charts you can go to the little dot to find out what poll is represented by each dot. It's a good feature that allows you to find out which poll is doing what. On the poor/fair/good chart all the numbers that say the economy is poor are coming from Rasmussen. Considering this is Powerline's favorite poll (in fact, it's the only poll they cite right now), I think it's fair to say the polling questions probably lean right. That does make me wonder about the validity of the those questions.
However, on the getting better/getting worse chart there have been a cluster of polls from Gallup that show about a 5% increase in the number of people who think the economy is getting worse. Personally, I would put more emphasis on those numbers largely because they aren't associated with a right-wing propaganda effort.
So -- what caused this increase? My guess is the continuing unemployment claims along with the latest jobs report have a fair amount to do with it. There's an old saying, "when your neighbor is out of work it's a recession. When you're out of work it's a depression." Simply put the employment situation bears on sentiment is a big way.
So -- does this mean my theory of a recovery is now in jeopardy? No. The next step in the consumer sentiment issue is a two step set of questions.
1.) Has this translated into lower retail sales? We get retail sales from the Census this week. Here's the chart of that number.
Notice that while the numbers took a big dive at the end of last year (right when consumer sentiment dropped because of the financial market turmoil) retail sales have bounced back to a more normal pattern starting in December of last year. Also notice the year over year number is showing a bottom. If we see these numbers start to tank in a big way over a few months then we'll be concerned.
2.) Will this pattern continue? The number of people who think the economy is "poor" is majority (53.7%) and has been increasing for about two months. Another month of an increase and it could create a problem by bleeding through into behavior.
However, this number overall has been bad for the last year meaning a majority of people have thought this way and yet the underlying economic numbers have continued to show a clear bottom. In other words despite a majority of pessimistic people retail sales and personal consumption expenditures have stabilized.
So -- the short version is this is something to watch and keep and eye on. But unless we see a sharp change in retail sales and personal consumption expenditures (which would be evidence of a behavioral effect) of the attitude it's not fatal.
