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Consumer Sentiment Lifts In December

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A leading indicator for the US economy

The Thomson Reuters and University of Michigan Consumer Confidence Index is an important indicator of the consumer’s perception of the US economy. Similar to other consumer confidence measures, it asks consumers about their views on the current economic conditions and their expectations for the next six months. Originally conducted in 1964, it’s one of the oldest consumer surveys available.

Consumption is the major driver of the US economy and accounts for 70% of GDP (gross domestic product). Consumption has been relatively subdued since the recession began. Americans have boosted their savings rate and spent only on essentials.

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The real estate bubble drove consumption in the mid-2000s. People took out cash refinances and spent the extracted home equity. This had the effect of increasing the cost basis for many people’s homes and left them vulnerable when house prices collapsed. So since then, people have focused more on paying down debt than spending.

Highlights from the report

The Consumer Sentiment Index rose to 93.8 in December, up from 88.8 in September. The Bloomberg survey consensus was 87.5. The Current Conditions Index rose to 105.7 from 102.7, and the Expectations Index rose to 86.1 from 79.9 last month.

Given that an index value of 90 has been more or less the average for the past 50 years, consumer confidence is finally back to normalcy. The index can vary widely. For example, in January 2000, it was 112, and in November 2008, it bottomed out at 55.3.

Implications for mall REITs

For mall REITs such as Simon Property Group Inc. (SPG), General Growth Properties Inc. (GGP), Taubman Centers, Inc. (TCO), Macerich Company (MAC), or the Realty Income Corporation (O) the performance of tenants is a critical driver of vacancy rates and returns.

While mall REITs aren’t directly exposed to consumer spending, consumer spending is still a critical driver. So far, based on the retail sales number, it looks like the back-to-school shopping season was decent, which bodes well for the holiday shopping season.

For quite some time, we’ve seen increases in sentiment without really seeing increases in spending. Perhaps this is beginning to change.

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