Are Consumer Sentiment Numbers Meaningless?

Traders across the globe are trying to figure one thing out right now: is Europe healing or not? Despite poor macroeconomic data, European citizens appear to be positive about the economy. Could these consumers be dead wrong about their economy?

According to surveys, German citizens' economic sentiments scored -21.6, higher than analysts' estimate of -49.2. Similarly, European citizens collectively scored -32.5, higher than the estimate of -48.7. As soon as these numbers came out, European equities and US equity futures moved higher.

Although European consumers feel better about their economy, global investors may feel differently. Numerous economic numbers that came out in the last two days may reveal problems unrecognized by the average consumer.

Various price indices either met or failed to meet analyst estimates. For example, the Euro, Italian, and British Consumer Price Index numbers simply met estimates and did not surpass the previous month's numbers. Moreover, the German Wholesale Price Index, the British House Price Index, and the Spanish HPI failed to meet analysts' estimates. Considering that basic measures of economic stability are not performing as expected, consumers may be displaying false hope for the region's prosperity.

Another overlooked aspect of the European economic situation is the fact that the EFSF has been unable to properly finance its bailout package for the region. While politicians are continuously deliberating about the care package, they have yet to identify a concrete strategy to temporarily heal the Eurozone.

The last three months have shown positive employment growth, retail sales, and manufacturing production. As a result, many consumer and economists have been very positive about the economy, convinced that things may be all right in the western world. One thing that they need to watch out for is that the holiday season tends to artificially prop up numbers.

The first example is that many temporary workers are hired during the holidays. Retailers need more people in the store, transportation companies need larger workforces to accommodate increased shipping demand, and manufacturers need more temp employees for the increased product demand. Large influxes of temp workers tends to drive down the unemployment rate and Initial Jobless Claims number, on a temporary basis, of course.

The average consumer also tends to purchase gifts and use up vacation time during the holiday season, which prompts numbers such as consumer spending to increase. This, in turn, results in positive retail sales for companies like Macy's M, Wal-Mart WMT, and Best Buy BBY. Trading dynamics, influenced by supply and demand between buyers and sellers, tends to positively influence numbers like the Consumer Price Index and Factory Orders.

Positive economic numbers may influence the average investor or trader to misunderstand economic trends. For example, investors may look at a retailer and learn that it is having a blow-out holiday season, in terms of sales. That investor may then enter the inherent rallying period at an unfortunate time and could lose his investment within months.

The reality is that underlying macroeconomic problems have not significantly changed. While positive employment could be a long-term trend, factors such as the US debt ceiling as well as Europe's sovereign debt contagion have not improved.

Both the United States and Europe are in dire conditions, but American investors are currently concerned about the Federal Reserve's plans for monetary policy. Without another round of quantitative easing, some investors fear that the United States will be unable to spur long-term economic and employment growth.

There are plenty of skeptics, however. The first two rounds of quantitative easing had very marginal effects on the American economy, and even had adverse effects. On one hand, unemployment never really improved due to quantitative easing. On the other hand, quantitative easing resulted in inflated commodity prices, which is not necessarily a good thing for the average American. For example, rising crude oil prices directly results in higher gas prices at the pump.

Investors also have to keep in mind that international macroeconomics will play a large role in the United States' future. For example, consider that European countries could default. If they defaulted during a third round of quantitative easing, American equities are likely to fall rapidly, despite the Fed's attempts to pump money in the market. So, given extreme international uncertainty, the Fed may be resistant to popular opinion regarding QE3.

During these uncertain economic times, some action may be better than none. Some traders believe that quantitative easing would, at the very least, prop up equities and give American some peace of mind while European concerns drag global markets downward. However, is a temporary, artificial boost best for Americans in the long-term?

The short answer is no. Continued Fed intervention is unlikely to solve long-term problems. Its revised strategy to purchase long-term debt and sell short-term debt may or may not have different results, but it seems likely that the long-term implications will not be much different than the first two rounds of quantitative easing.

Regardless of what the Fed does, traders will be able to profit from any comments made. While the overall economy may not improve, independent traders can make money if they pay attention to the news. If traders keep up with real-time news, they may be able to capitalize on short-term movements in the equity markets.

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