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University of Michigan Consumer Confidence dipped in July to 97.9


Consumer sentiment was virtually unchanged from last month, and was nearly identical with the average since the start of 2017, according to the University of Michigan Surveys of Consumers.

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, said U-M economist Richard Curtin, director of the surveys.

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, Curtin said. All households anticipated income gains of 2.2 percent in the year ahead, with those under age 45 expecting gains of 4.8 percent. The data indicate that real consumer spending should advance by 2.6 percent in the year ahead.

“The unique aspect of the current situation is the potential negative impact of tariffs on the domestic economy,” he said. “The news heard by consumers about tariffs dominated all other aspects of the economy in July. References to tariffs rose significantly in the past month, rising to 35 percent in July from 21 percent in June and 15 percent in May.

“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 discretionary spending as consumers may begin to take precautionary steps against the potential for a worsening economy.”

Potential Impact of Tariffs
Consumers anticipated a slightly slower pace of economic growth during the year ahead, although the majority of consumers still judged the overall conditions in the economy would remain favorable. Importantly, three-fourths of all consumers expected the unemployment rate to remain at its current low or to inch downward in the
upcoming year.

So far, the greatest impact of prospective tariffs was on vehicles. Vehicle buying plans posted a significant decline in July, falling to its lowest level in five years. Consumers voiced the worst assessment of vehicle prices since early 1997, partly due to fears of tariffs.

Personal Finances Remain Strong
Personal finances remained very favorable as 53 percent of all households cited recent financial gains, just below last month’s 55 percent, with 43 percent specifically mentioning recent income increases, also slightly below last month’s 47 percent.

Gains in net wealth were reported by one-in-five households in the top two-thirds of the income distribution, although small net wealth declines, largely due to increasing household debt, were cited by those in the lowest income third for the first time in more than a year. Rising home values were reported by two-thirds of all homeowners in July, a figure that has remained largely unchanged over the past six months.

Consumer Sentiment Index
The Consumer Sentiment Index was 97.9 in July 2018, between June’s 98.2 and last July’s 93.4, and nearly identical to its average since the start of 2017 (97.4). The Expectations Index rose to 87.3 in July, up from June’s 86.3 and last July’s 80.5. The Current Conditions Index fell slightly to 114.4 in June, down from 116.5 in June and last July’s 113.4.

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.




Posted: July 27, 2018 Friday 10:00 AM




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