Consumers were a bit less optimistic in July than one month or one year ago, although consumer confidence remains at a reasonable high level. The recent decline was due to rising concerns about prospects for the economy, that were mainly expressed by upper income households. Uncertainties surrounding global economic prospects and the presidential election have made consumers more cautious in their expectations for future economic growth as well as employment growth. Strength in personal finances and low interest rates will maintain the growth in real consumption at 2.6% through mid 2017.

Personal Finances Regain Strength
Consumers remained upbeat about their current finances. The smallest proportion reported that their finances had worsened during the past year—24%—than anytime since the last peak in 2007. The fewest consumers in eight years complained about income losses in each survey during the past three months. Importantly, income expectations for the year ahead remained positive, especially among younger and middle income households.

Favorable Buying Attitudes
Ultra low mortgage rates have extended favorable buying plans for homes despite a falloff in perceptions of low and attractive home prices. Low mortgage rates were mentioned three times as frequently as low prices when consumers were asked to explain their views toward current home buying conditions. For vehicle purchases, low interest rates were mentioned twice as frequently as attractive pricing. Only for purchases of large household durables did attractive pricing dominate low interest rates.

The Consumer Sentiment Index was 90.0 in the July 2016 survey, down from 93.5 in June and last July’s 93.1. Most of the decline was due to the Expectations Index, which fell to 77.8 in July, down from 82.4 in June and last July’s 84.1. The Current Conditions Index fell slightly to 109.0 in July, just below last month’s cyclical peak of 110.8. The gap between the Expectations Index and the Current Conditions Index has grown, averaging its largest difference over the past three months since its last peak in 2006.

The enduring strength in consumer sentiment during the past eighteen months has been in personal finances and buying conditions, while the outlook for the economy and job creation has gradually weakened. Although this mirrors the pattern of aging expansions, it does not necessarily imply we are coming closer to a downturn. Indeed, it may reflect nothing more than lackluster growth during the past seven years and an unusual degree of economic uncertainty. Nonetheless, avoiding a downturn is now more dependent on gains in consumer spending than has been typical in the past, and maintaining that strength deserves special attention.”