Economy

July Consumer Sentiment Slips but Still Robust

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The final University of Michigan Consumer Sentiment Index for July declined slightly to a reading of 97.9 after rising to 98.2 in June. When the preliminary July index score was reported earlier this month, the index reflected a larger dip to 97.1.

The decline over the past two months is “minor” and is likely due to consumer concerns over tariff and trade issues. Strong employment numbers and rising incomes continue to be the main influence on sentiment.

Economists polled by Bloomberg were expecting a final July reading of 97.2.

The month-over-month consumer expectations subindex rose from 86.3 to 87.3 (up 1.2%) and the current conditions subindex fell from 116.5 to 114.4 (down 1.8%).

Year over year, the consumer sentiment index is up 4.8%, the current conditions subindex is up 0.9% and the consumer expectations subindex is up 8.4%.

The survey’s chief economist, Richard Curtin, said:

Consumer sentiment posted a trivial 0.3 point one-month decline, remaining a half of an Index-point or less from the average in the prior twelve months (97.7) or since the start of 2017 (97.4). Despite the expectation of higher inflation and higher interest rates during the year ahead, consumers have kept their confidence at high levels due to favorable job and income prospects. This mix of positive and negative expectations is similar to past expansions, and, as in the past, it will prevail as long as increases in inflation and interest rate hikes remain modest.

What is unique about the current situation is the potential impact of tariffs on the domestic economy. Concerns about tariffs greatly accelerated in the July survey. Across all households, 35% spontaneously mentioned that the tariffs would have a negative economic impact in July, up from 21% in June and 15% in May. Consumers who had negative concerns about the tariffs voiced a much more pessimistic economic outlook, had inflation expectations that were 0.6 percentage points higher than those who hadn’t mentioned tariffs, and were more likely to anticipate that the unemployment rate would rise during the year ahead. Of course, these negative economic expectations could quickly disappear if the trade issues with Europe are promptly settled and immediately followed by agreements with China, Canada, and Mexico. Resolution is critical to forestall decreases in consumer discretionary spending as a precaution against a worsening economy.

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