A popular consumer sentiment index jumped to its highest level in six years in July. The Thomson Reuters/University of Michigan Consumer Sentiment Index came in at 85.1, the organizations reported Friday. The reading beats consensus estimates of 84.0 and July's preliminary reading of 83.9.
Because the consumer sentiment index is based on surveys asking people how they feel about the economy, it's hard to know exactly what factors are driving it upward. However, the latest readout may be a sign that Americans are feeling the effects of an improving labor market. In June, employers reported adding 195,000 jobs, according to the Labor Department, a figure that surprised analysts.
"Not only has job growth been good, but it's beat [Wall Street] estimates of it. That could lead people to think things are better," says James Marple, senior economist at TD Economics.
Not only is an improving consumer sentiment index a sign that the economy has been improving; it can signal that more economic growth is ahead.
"Ongoing improvement [in consumer sentiment] is a good leading indicator that spending acceleration will continue," says Marple.
Then again, Americans also seem nervous about the future. The survey also measures two other components: consumers' estimations of current and future economic conditions. Americans' views of current conditions posted healthy growth, from 93.8 to 98.6, but the expectations index fell slightly, from 77.8 to 76.5.
Currently, the index is in a place it had last seen in July 2007, when it hit 90.4, before taking a fast tumble precipitated by the financial crisis. In the depths of the crisis, in late 2008, the index hit a low of 55.3.
Though it's exciting to hear that consumer sentiment is at a six-year high, it's also important to remember that consumers' opinions are subjective. The economic crisis may have recalibrated how Americans view the economy, meaning that a reading of 85 now is not the same as an 85 in 2007, just as the economy is in nowhere near the same place as it was in 2007.
"What's more important to look at right now is it's moving up, rather than comparing it to previous levels," he says.