May consumer sentiment reached a level not seen since July 2007, which could lead to an increased need for retail inventory financing in the near future.
The Thomson Reuters/University of Michigan final index of consumer sentiment jumped from 76.4 in April to a mark of 84.5. This was higher than expected, as the preliminary reading came in at 83.7 earlier in May.
Two of the biggest factors boosting confidence among consumers were higher real estate values and stock prices, which lead to an increase in personal wealth across the country.
Rising consumer sentiment is just another sign that the economy has improved. During the recession, the index averaged 64.2. However, there is still room for improvement before reaching pre-recession levels, as the index averaged 89 in the five years before the financial crisis.
"Housing is improving, house prices are rising, gasoline prices have been a support for much of this year to confidence, and we have stock prices that have climbed – I think all of that is helping to lift consumer sentiment," Ryan Sweet, senior economist at Moody's Analytics, told Bloomberg. "If consumers remain relatively upbeat about the economy's prospects, they're unlikely to pull back on spending."
Consumers felt much better about their personal finances in May as well, as the survey's current conditions indexed reached 98 – the highest reading since August 2007. Meanwhile, the expectations index, which measures how consumers feel about the next six months, rose from 67.8 in April to 75.8.
Consumer spending falls in April
The hike in confidence in May is a welcome sign, as consumer spending unexpectedly dipped in April.
According to the U.S. Department of Commerce, spending fell 0.2 percent to the lowest reading since May 2013. This was the first time in almost a year that consumer spending declined. Spending was held back by poor demand for utilities and a drop in gasoline prices.
"Consumer spending is on a very modest track because income is not growing very much," Kevin Logan, chief U.S. economist at HSBC Securities, told Reuters. "Wage gain is very low even though job growth has picked up."
Another factor that held back consumer spending was the $5.6 billion decrease in personal income seen in April.
Despite the decline in consumer spending, the boost to confidence could lead to more retailers needing to use inventory financing in the near future.
Should May's high sentiment level lead to increased consumer spending, small- to medium-sized retailers in the U.S. could see additional business in the coming months.
As sales pick up, retailers will likely have a need to replenish inventory. However, smaller companies can often struggle to do this on their own dime, and limited available capital can make it difficult to obtain a loan from a bank.
Luckily, retail inventory financing is an available option. This type of asset-based lending allows small- to medium-sized companies to use current product as collateral to obtain a revolving line of credit, which, in turn, can be used to purchase additional inventory.