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Why Did Consumer Sentiment Fall in February?

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Consumer sentiment fell to 90.7 in February 2016

According to the University of Michigan, the consumer sentiment preliminary index fell to 90.7 in February—compared to 92.0 in January 2016. Although the income level is rising, consumer spending fell to a four-month low in February.

As a result, the Consumer Discretionary Select Sector SPDR (XLY) fell by 3.7% over the past month as of February 12. Companies such as Walt Disney (DIS), Home Depot (HD), Nike (NKE), and Starbucks (SBUX) fell by 7.4%, 4.2%, 4.0%, and 3.5%, respectively, over the past month as of February 12.

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Consumer current condition index fell to 105.1 in January

In February 2016, the current conditions index fell to 105.8—compared to 106.4 in January. Also, future expectations fell to 81.0—compared to 82.7 in January.

Increased inflation supported by rising income level

Consumer sentiment declined with a decrease in current conditions and future expectations in February. The short-term outlook for the economy isn’t favorable. However, the long-term predictions remain encouraging.

To boost optimism about the economy, the Fed hiked the federal funds rate by 0.25% to 0.50% on December 16. Although an additional rate hike depends on economic conditions, the rise in the interest rate needs to be accompanied by an increase in the income. Otherwise, consumers’ real income could be negatively impacted by rising inflationary pressure and no progress in the income levels.

Import and export price indexes have a direct bearing on the competitive position of the US in foreign markets. Next, we’ll see how the volatile global environment is impacting the prices.

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