Consumers’ current view of the economy was negatively affected by gas prices hitting the $3 mark, as the surveys’ barometer of current economic conditions was 79.8 in early January, down sharply from 85.3 in December and below the 81.1 reading last January.

However, consumers are more optimistic about the future economic outlook. The 12-month economic outlook index jumped to 87, which was the highest since September 2009, and the survey’s gauge of consumer expectations rose to 68.2 from 67.5 in December.

In addition, just 21 percent of consumers surveyed expected the unemployment rate to increase in the year ahead, the lowest figure recorded in 10 years.

“The stronger performance of the economy was expected to be reflected in the near term by more favorable expected changes in employment,” Richard Curtin, director of surveys of consumers from Thomson Reuters and University of Michigan, said in a statement.

The Reuters/University of Michigan Consumer Sentiment Index rose to 74.5 in December, up from 71.6 in November and 67.7 in October. Consumers have a much rosier view of the current state of the economy, as the Current Conditions Index stands at 85.3, up from 82.1 in November and 9.4% higher than a year ago.

Surveys of Consumers chief economist, Richard Curtin, said “The best holiday gift to consumers was news that job gains were on the horizon.”

However, consumers’ view of their personal financial prospects remain dismal. The Expectations Index rose to 67.5 from 64.8 in November, but remains 2% below levels from a year ago:

• Just 23% reported recent gains in their finances, unchanged from last December, as twice as many consumers reported income declines as income advances
• Just one-in-four consumers expected their finances to improve in the year ahead, which has remained unchanged for the past six months
• The majority of consumers anticipated no income increases during the year ahead, as they have for a record 24 consecutive months

Curtin noted “Compared with the more favorable prospects for the overall economy, consumers have maintained a very cautious outlook for their own finances. They have good cause to be cautious. This was the second time in 2010 that news of job gains prompted a rally in confidence. Indeed, consumers voiced nearly the same confidence at the end of 2010 as at the start of the year.”

The U.S. Department of Commerce released March retail sales this morning, reporting that sales rose an adjusted 1.6% from February and surged 10.0% (unadjusted) from the year-ago period, the largest year-over-year increase since March 2000. This was the fifth consecutive gain after 15 straight monthly declines:

However, the extremely strong gains are deceiving as results are being compared to very depressed levels from a year ago, when overall sales tumbled 8.4%, 11.6%, and 10.6% in January, February, and March respectively. In addition, much warmer and drier weather after a dismal February, as well as Easter falling a week earlier this year certainly played a part in this month’s strength.

Total sales for the month were still down 1.6% from both March 2008 and 2007. Year-to-date, total sales are 5.8% higher than last year, but still down 5.0% and 1.7% from 2008 and 2007 respectively. To put in perspective how absolutely dismal 2009 was, consider that in the previous 15+ years, from January 1993 through August 2008, there were a total of only 3 months in which YoY decreases were reported:

For the month, Auto & Parts Dealers (+18.1% YoY / +6.7% MoM), Online & Catalog retailers (+14.8% YoY / +0.2% MoM), and Clothing & Accessories Stores (+9.9% YoY / +2.3% MoM) were among the strongest gainers. Total sales excluding Autos were up 8.3% from last year, while total sales less Autos and Gas Stations showed a 6.2% year-on-year gain. Stores which are highly leveraged to the housing market, including Furniture & Home Furnishings Stores (+6.5% YoY) and Building Materials & Supplies Dealers (+3.3% YoY) have finally started to show signs of stabilization after struggling for more than two years.

Another positive sign is the return of discretionary spending at Department and Electronic Stores. Sales at Department Stores posted its second straight gain, increasing 5.2% from last March after 29 consecutive monthly declines, while sales at Electronic and Appliance stores (+4.9%) rose for the first time in 19 months, though year-to-date sales are still down 1.1% from 2009.

The National Retail Federation’s measure of retail sales, which excludes autos, gas and restaurants, showed a 0.9% monthly gain and rose an unadjusted 5.7% from last March. “It’s evident consumers were feeling much better about the economy and their finances last month,” said Rosalind Wells, Chief Economist for NRF. “Pent up demand combined with an early Easter and warm Spring weather significantly boosted consumers’ moods and retail sales.”

Because the early Easter pulled sales into March from April last year, the combined March-April period will be a much better barometer of performance. Going forward, we expect continued year-over-year gains after sharp the declines in 2009. Consumer confidence has risen along with the financial markets, but elevated unemployment and a depressed housing market will continue to weigh heavily on the consumer mindset.

Click here for detailed tables and graphs by line of business.

The U.S. Department of Commerce released February retail sales this morning, reporting that sales rose an adjusted 0.3% from January and increased 4.1% (unadjusted) from the year-ago period. Analysts had expected the unseasonably cold weather and severe snowstorms across the East Coast to impact performance, but it appears spending held up relatively well. This was the fourth consecutive year-on-year gain after 15 straight monthly declines:

However, the gains are more representative of the extremely easy comparisons from last winter, when overall sales tumbled 8.8%, 8.4%, and 11.6% in December, January, and February respectively. Total sales for the month were still down 8.0% from February 2008 and 1.9% from February 2007. To put in perspective how absolutely dismal 2009 was, consider that in the previous 15+ years, from January 1993 through August 2008, there were a total of only 2 months in which YoY decreases were reported:

For the month, Gasoline Stations (+24.6% YoY / +0.3% MoM) and Nonstore retailers (+12.7% YoY / flat MoM) were among the strongest gainers. Total sales excluding Autos were up 4.6% from last year, while total sales less Autos and Gas Stations showed a 2.5% year-on-year gain. Stores which are highly leveraged to the housing market, including Furniture & Home Furnishings Stores (-1.9% YoY) and Building Materials & Supplies Dealers (-4.4% YoY) continue to struggle and have yet to show meaningful signs of a recovery.

Another worrying sign is the weak discretionary spending at department and electronic stores. While spending at department stores posted a slight 0.4% gain in February from a year ago, it was only the first monthly increase in 29 months, while sales at electronic and appliance stores dropped for the 19th consecutive month. For all the talk of “pent-up” demand, we have yet to see any recovery in discretionary spending at these stores.

There is no doubt the recent strength in retail is a positive sign, but we are skeptical the gains will continue to hold up. The government has taken extraordinary measures to put money in the pockets of consumers, including unemployment benefits up to 99 weeks, a 65% subsidy on COBRA payments, and a multitude of housing programs to lower monthly mortgage payments. Yet even with all of this support, the recovery hardly looks robust when compared to past post-recession periods.

Indeed, recent confidence survey show consumers are not fully buying into the recovery story. After climbing along with the stock market in the back half of 2009, confidence indices have begun to slip as consumers are still extremely worried about unemployment and their own personal finances.

According to the preliminary March reading, the Reuters/University of Michigan Consumer Sentiment Index slipped to 72.5 from 73.6 in February, and now sits under the level from September ’09. Based on the survey, consumers expect the unemployment rate to stay elevated at 9.7% for all of 2010, and are losing confidence in help from government economic policies.

“(The sentiment reading) really has shown very little variation over the past several months, and that’s mostly because consumers no longer fear unemployment will go up any more, but they don’t expect it to improve very much in the year ahead,” said Richard Curtin, director of the surveys.

January and February are typically the lightest months of the year, and March will benefit from Easter falling a week earlier this year than last. So, we will be focusing on combined March/April results to see if the positive momentum can continue.

Click here for detailed tables and graphs by line of business.

Consumer sentiment in the U.S. held relatively steady in early January, as views of an improving economy and rising stock prices were offset by worries over personal finances, unemployment, and inflation. The Reuters/University of Michigan Index of Consumer Sentiment rose slightly to 72.8 from 72.5 in late December.

The Current Conditions Index rose to 81.0 in January from 78.0 last month, its highest level since March of 2008. However, this was offset by a drop in the Consumer Expectations Index which has been stagnant since May of 2009, from 68.9 in December to 67.5.

“While consumers anticipated continuing gains in the overall economy, few consumers expected an immediate shift toward the type of positive developments that would improve their job and income prospects,” Richard Curtin, director of the surveys, said in a statement.

While sentiment has rebounded significantly from a 28-year low of 55.3 reached in November 2008, consumers are still extremely concerned with their own finances. Better economic conditions have yet to lead to any meaningful improvement in employment, and foreclosures continue to wreak havoc in the housing market. As gas prices once again creep towards $3/gallon, inflation expectations continue to ramp up among consumers.

Confidence improved in December as consumers are feeling slightly better about expectations for economic growth and employment. However, the gains are tenuous as personal finances are still being described as “dismal”. The Reuters/University of Michigan Index of Consumer Sentiment rose to 72.5 in December from 67.4 a month ago. While the index sits near the top of its two-year range, it still remains well below the 10-year average and below the 73.5 print we saw in September.

Consumers’ views of their current finances have improved somewhat – 49% reported a worsening financial situation this month compared to 57% a year ago – but just one-in-seven expect any inflation-adjusted income gains during the year ahead. The largest factor in the index improvement was deep discounting on a wide range of household goods by merchants trying to spur holiday sales, which more consumers cited than ever before in the 60-year history of the survey. The Current Conditions Index rose to 78.0 from 68.8 for the month, the highest level since March 2008.

Most believe the worst is behind us, as just one-in-five expect the economy to worsen in the year ahead. While consumers are much less pessimistic about the direction of the economy than a year ago, 54% still expect unfavorable economic conditions going forward. The Index of Consumer Expectations rose from 66.5 to 68.9 in December, right in the middle of its roughly 10-point range since May of this year.

Commenting on the results, University of Michigan Survey of Consumers Chief Economist Richard Curtin said “Consumers reported that the economy was slowly improving and thought that the unemployment rate would only marginally increase. While most think the worst is over; the problem is that consumers are still quite uncertain about when prospects for their own finances will improve. Even when consumers become convinced that sustained gains will be forthcoming, there will still be strong spending headwinds, including intentions to add to their savings and reserve funds and to decrease their indebtedness as well as continued restraints on the availability of credit. Overall, the data suggest consumer spending will rise by just 1.6% in 2010.”

The bottom line is that consumers will not truly believe in the recovery until the job and housing markets materially improve. Spending will remain subdued until people feel more comfortable about their personal finances and worries about unemployment subside. We will get another peek into the mind of the consumer when the Conference Board Consumer Confidence Index, which represents a larger survey sample, is released next Tuesday.

Within the survey, the 12-month economic outlook index rose to 79, the highest since September 2007, from 69 in August. The 1-year inflation expectation eased to 2.6, the lowest since March, and down from 2.8 in August.

“Confidence rebounded in early September as consumers increasingly expected the economy to improve despite their reluctant conclusion that their own financial situation would remain quite problematic for some time,” the Reuters/University of Michigan Surveys of Consumers said in a statement.

Because of unemployment worries and lack of income gains, improved confidence has yet to translate into increased spending. If we look at results from the consumer survey going back over 50 years, we see that confidence remains at extremely low levels. Though we appear to be emerging from the longest post-war recession, now entering its 22nd month, consumers have a long way to go before they will be comfortable spending again.