The subprime lending crises and rising gas prices are sending alarms throughout
the general markets. But before we lose our heads with worry over how those dynamics will affect the consumer electronics industry, it’s wise to keep a calm
eye on some of the fundamental choices being made by the Federal Reserve. Those choices will deeply impact consumer sentiment through the next two quarters.
Consumer sentiment has now moved into a six-month low driven by concerns over wage gains, rising prices and a mixed economic outlook for the remainder of the year. Driven in no small part by rising gasoline prices and an apparent erosion of home values, consumers are becoming aware of fundamental imbalances that they perceive threaten their standard of living. But economic indicators offer contradictory evidence that consumers have yet to shift spending habits and rein in their disposable incomes. February data suggests that consumer spending and personal income was actually up by 0.6 percent in both categories. This could be taken as an indicator that wage growth signifies core strength in the U.S. economy, given the fact that consumer spending was affected by cold weather, thereby driving up utilities costs and spending.
What is worrisome, though, is the upward trend of inflation readings. Inflation was up 2.4 percent on an annualized basis and is higher than what the Fed traditionally considers within its “comfort zone” of a one to two percent increase. The Fed has indicated it won’t change rates anytime soon. But if inflation increases there is speculation that the Fed may have to cut rates. This indicates, at least for the time being, that the underlying strength of the U.S. economy has been underestimated.