Consumer sentiment is on the rise. June saw a four point increase in the overall consumer sentiment rating that the American economy is given each month. The increase is a sharp one that significantly defeated what analysts expected. However, while the news is good on paper, many are still concerned about how much of an impact the consumer sentiment reading will have on the overall outlook of the economy.

The University of Michigan conducted the study, which revealed that it was up significantly from May, and was up by more than 10 points from last year at this time. It was found that the consumer sentiment rating last year at this time was just above 80, sitting at 82.5. Today, the consumer sentiment rating sits at 94.6.

This rating is a positive sign of the economy moving in the right direction because it is an indicator of how people feel about the economy. It correlates directly with consumer confidence, and while it isn’t necessarily a reflection of how people will spend, or what they’re comfortable spending – it does do a lot to show the market as a whole that things are moving in the right direction.

Many people confuse consumer confidence with consumer sentiment. However, the distinction between the two is that consumer confidence is a reflection of what the individual is willing to spend or see leave their own pocket, whereas consumer sentiment is a broader, more general pulse of where people stand with the economy. In other words, that is to say that while a family might not be comfortable spending $400 in a store yet, like they would have before the recession, there is a very good chance that they feel significantly better about the economy than they did just a few months ago.

This switch is what concerns economists though because it could be a skewed response. For example, what many consumer considered good before the recession might be significantly different than what people consider good today. This makes the reading a little less accurate than it would be if it were based on something more concrete.

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Many analysts though urge that there is a shift taking place amongst consumers. More often than not, sales are being driven by incentives, and while consumers are happy about that, economists say that this isn’t a good judgment of positive movement. If retailers, automakers, and others in the business world have to incentivize sales, then they are ultimately losing out on what could be other potential sales down the road.

Incentivizing is great when the economy is doing well. However, when that is the single factor getting people out, instead of a positive move by the economy drawing people out to spend their money, it’s a reflection of how much work still has to be done to make the economy whole again.

SOURCEWall Street Journal