The John Batchelor Show

VIDEO: Jobs Up, Oil Down

December 17, 2014

Steve Moore, Heritage. Phil Izzo The rise in the University of Michigan measure of US consumer confidence in December, to a new 7-year high of 93.8 from 88.8 in November (consensus 89.5, CE 94.0), suggests that the recent strong performance of retail sales will continue in December.

Admittedly, 3 points of the 5 point rise was due to December’s normal seasonal effects (the University of Michigan measure is not seasonally adjusted). Nonetheless, our seasonally adjusted index rose by 2 points also to a 7-year high. Both the current conditions and expectations indices rose. Confidence is clearly being boosted by record high equity prices, the breakneck pace of job growth and the plunge in gasoline prices.

At face value, this survey is consistent with annualised real consumption growth accelerating from 2.2% in the third quarter to around 5.0% in the fourth. We currently think that 3.0% is more plausible, but it is clear in which direction the risks lie.

Finally, the rises in the one- and five-year ahead measures of inflation expectations (both to 2.9% from 2.8% and 2.6% respectively) will ease fears that lower gasoline prices are weighing on inflation expectations. As such, when it comes to thinking about when to raise rates, the Fed will place more weight on the stronger economic outlook than the weaker near-term inflation picture.