US consumer sentiment picks up

There are two indices that gauge the level of consumer confidence:

• the University of Michigan Consumer Sentiment Index
• the Conference Board Consumer Confidence Index

These indices help to assess the level of consumer optimism or pessimism about the economy. Higher consumer confidence results in higher spending.

The consumer sentiment index, or CSI, published by the University of Michigan and Thomson Reuters, is based on 500 telephone household interviews. The preliminary CSI for January 2015 surged to an 11-year high of 98.2. In December 2014, the index reached 93.6, its highest since January 2007.

The consumer confidence index, or CCI, is based on a survey of 5,000 households and is conducted by Nielsen on behalf of the Conference Board. Opinions on current conditions constitute 40% of the index and expectations regarding future conditions make up the remaining 60%. The index rose to 92.6 in December 2014 compared to 91 in November. The consumer confidence index is usually more volatile than the consumer sentiment index.

The rise in these indices reflects positive consumer sentiment about the state of the economy. That means they’re willing to spend more, especially on discretionary items (XLY) like apparel, electronics, and home improvement products.

Compared to retailers selling consumer staples (XLP), companies selling consumer discretionary items have been under more pressure over the past few years. Challenging macro conditions and lower consumer spending have made for lean years for department stores such as Macy’s (M), Nordstrom (JWN), Kohl’s Corporation (KSS), and Sears (SHLD).

The steep decline in oil prices and favorable job data, combined with the expectation of an increase in wages, have caused the consumer confidence indices to rise. The next article in this series will look at the impact of lower oil prices on the retail industry.