When the University of Michigan released its preliminary reading on consumer sentiment for May at a whopping 102.4, it came with the caveat that the data had been collected prior to the end of trade talks and the trade war with China kicking off. The revision did bring the index reading down, and it fell by more than economists had expected.

May’s final sentiment index reading was revised down to 100.0 after the preliminary 102.4 reading blew past estimates. The Wall Street Journal consensus forecast for the revision was 101.0

Although consumer sentiment remained at very favorable levels, the University of Michigan indicated that there was a significant erosion of confidence during the second half of May.

The index of Current Economic Conditions was at 110.0 for May, compared with 112.3 in April (and 111.8 a year ago). The Index of Consumer Expectations was 93.5 in May, up from 87.4 in April (and 89.1 a year earlier).

The official report was full of references to tariffs and trade wars. Friday’s revised statement said:

The late-month decline was due to unfavorable references to tariffs, spontaneously mentioned by 35% of all consumers in the last two weeks of May, up from 16% in the first half of May and 15% in April and equal to the peak recorded last July in response to the initial imposition of tariffs. The year-ahead inflation expectations jumped to 2.9% in May up from last month’s 2.5%. Year-ahead inflation expectations among those who unfavorably mentioned tariffs was 0.5 percentage points higher than those who made no references to tariffs. Importantly, the gain in inflation expectations was recorded prior to the actual increases in consumer prices due to the most recent hike in tariffs. While higher inflation expectations modestly reduced real income expectations, the largest impact was on buying conditions for appliances and other large household durables, which fell to their lowest level in four years. The combination of higher inflation and a slower pace of spending provide conflicting signals for monetary policy. The divergence will further widen if, as is likely, the trade war escalates. Will the Fed risk higher inflation by lowering interest rates, or risk higher unemployment by raising interest rates? This [dilemma] comes at a time when consumers have expressed the highest level of confidence since 2002 in the government’s ability to keep both inflation and unemployment at reasonably low levels (see the chart). Consumers now judge economic security more important than a faster pace of growth in their personal incomes or household wealth.

While this is still quite a strong report, the tone has been set for a lower preliminary reading in June, now that a first round of 5% tariffs is set to take place with goods coming from Mexico.

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