January Consumer Sentiment Index Plunges

The preliminary University of Michigan Consumer Sentiment Index for January tumbled month over month from a final December reading of 98.3 to January’s level of 90.7. The January reading may indicate that the government shutdown added to existing concerns over the impact of tariffs and volatile financial markets is eroding U.S. consumers’ willingness to spend.

The preliminary reading is 5.2% lower than the preliminary January 2018 index score of 95.7.

Economists polled by Bloomberg were expecting a January reading of 97.

The January subindex readings were all lower compared both to December and to last January.

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The month-over-month consumer expectations subindex fell 10% from 87.0 to 78.3 and the current conditions subindex dropped from 116.1 to 110.0 (down 5.3%).

Year over year, the current conditions subindex dipped 0.5% and the consumer expectations subindex sank by 9.3%.

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

Consumer sentiment declined in early January to its lowest level since Trump was elected. The decline was primarily focused on prospects for the domestic economy, with the year-ahead outlook for the national economy judged the worst since mid 2014. The loss was due to a host of issues including the partial government shutdown, the impact of tariffs, instabilities in financial markets, the global slowdown, and the lack of clarity about monetary policies. Aside from the direct economic impact from these various issues on the economy, the indirect effect meant that half of all consumers believed that these events would have a negative impact on Trump’s ability to focus on economic growth.

While the January falloff in optimism is certainly consistent with a slowdown in the pace of growth, it does not yet indicate the start of a sustained downturn in economic activity. It is the strength in personal finances that will continue to support consumption expenditures at favorable levels in 2019. Nonetheless, consumers now sense a need to buttress their precautionary savings, which is typically done by reducing their discretionary spending. Evolving job and wage prospects, which were slightly weaker in early January, are critical to extending the current expansion.

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