Consumer sentiment rises sharply

#Consumer #sentiment highest in nearly two years

Consumer sentiment has jumped to the highest level since September 2021, driven by ongoing disinflation and improved financial situations.

According to the University of Michigan’s survey on Friday, the overall sentiment increased to 72.6 in July, up from 64.4 previously.

After a prolonged period of dealing with elevated inflation, consumers have started to better understand the impact of inflation on their daily lives and have come to accept that persistent inflation will continue for some time. This is reflected in the long-term inflation expectations for the next 5 to 10 years, which have remained in the range of 2.9-3.1% for about 2 years.

With inflation concerns fading and the stock market rising, consumers are feeling much more positive about their financial situations. The subindex for household finances rose to 95, the highest level since early 2022 when the rate hike campaign began. The improved overall sentiment and financial situation suggest a greater inclination to spend in the coming months. According to the survey, spending intentions for major household items, vehicles, and new homes have all increased compared to the previous month.

Interestingly, despite the significant improvement in sentiment, consumers are expecting more job losses in the next 12 months. The unemployment index rose to 84, the highest level since September 2022. This further strengthens the belief that a slowdown in the labor market will continue.

All the signals from the survey reaffirm our prediction that the economy is approaching a critical point where disinflation and a slowing labor market are occurring simultaneously, making it difficult to determine the eventual outcome—whether it will be a soft landing or a hard landing—at the end of the rate hike cycle. Certainly, the probability of a soft landing has significantly increased based on today’s data on sentiment and recent data on inflation and the job market.

However, this also complicates the Federal Reserve’s task, as the line between doing too much and doing too little has become thinner. Therefore, achieving a balance between the dual mandates of price stability and employment growth will require a more cautious approach, making a pause after the July meeting more favorable than a premature rate cut or further tightening.

The July preliminary reading for the University of Michigan Consumer Sentiment Index jumped 8.2 point to 72.6 after the final 64.6 in June. It was a was well above market expectations and the highest since 72.8 in September 2021. Could this represent a turning point for consumers in terms of worrying about a recession and job losses, and the depredations of inflation on household budgets? I think it might.

Consumers were solidly more positive about both current and future conditions. The current conditions index was up 8.5 points to 77.5 in July and the highest since 77.7 in October 2021. The six-month expectations index was up 7.9 points to 69.4 in July, the highest since 79.0 in July 2021.

An easing in worries about a deterioration in labor market conditions from plentiful jobs and competitive compensation have helped improve consumer confidence. However, it may be more important for consumers that rising food and energy prices are no longer eating up discretionary income, and households can look forward to enjoying some extra income.

The one-year inflation expectations measure was up a tenth to 3.4% in July, a minor increase that left the reading just above 3.3% in June which was the lowest since 3.1% in March 2021. The five-year inflation expectations measure is also up a tenth to 3.1% in July. This is the top of the recent trend range of 2.9%-3.1%. It suggests little change in consumers’ outlook for price increases.

Fed policymakers will take some satisfaction in that so far their efforts to combat the current period of inflation have remained credible and kept inflation expectations anchored. #consumersentimentindex

Copyright © Theresa A Sheehan