Consumers grew less optimistic in their future this July, however confidence levels remain historically high, according to the Survey of Consumers conducted by the University of Michigan.
One expert predicted consumer sentiment would decrease in July, and explained what that would mean for the economy.
“If Friday's Consumer Sentiment Index comes in lower again, it's underscoring people don't have extra money to spend now, and are pessimistic about the future,” said Robert Frick, Navy Federal Credit Union corporate economist. “And right now, that index is a good measure of the key number in today's economy: wage growth.”
The Index of Consumer Sentiment fell 1.8% from 95.1 last month’s 95.1 to 93.4 in July. This is up 3.8% from last year’s 90.
“The overall Sentiment Index has declined by 5.1 index-points since the January peak, which was the highest figure in a dozen years,” Survey of Consumers Chief Economist Richard Curtin said. “The relatively small decline still left the Sentiment Index higher in the first seven months of 2017 than in any other year since 2004.”
“The size of the decline was tempered by record favorable views of Current Economic Conditions, which rose to its highest level since July of 2005,” Curtin said. “These gains were mainly due to improvements in consumers' personal finances.”
An article by Jill Mislinski for Advisor Perspectives explains what this means historically:
The Michigan average since its inception is 85.4. During non-recessionary years the average is 87.6. The average during the five recessions is 69.3.
The Current Economic Conditions index increased to 113.4 in July. This is up 0.8% from last month’s 112.5 and up 4% from 109 last year.
The Index of Consumer Expectations, however, decreased 4.1% from last month’s 83.9 to 80.5 in July. This is up 3.5% from 77.8 last year.
“At the same time, consumers expressed less optimism about future prospects for the overall economy and for their own personal finances,” Curtin said. “If it [the index] continues to decline by another 10 points in the second half of 2017, the loss would become more worrisome.”
“Moreover, while current conditions were judged strictly on the performance of the economy, expectations continue to be significantly influenced by partisanship: the difference on the Expectations Index between Democrats and Republicans was 45 Index-points; among Independents, in contrast, the Expectations Index was exactly equal to the weighted difference between the partisan extremes, 80.5,” he said. “Importantly, the partisan gap has narrowed in the past six months, mostly due to Republicans tempering their optimism.”
Curtin explained that while the recent declines among Republicans were somewhat predictable, the maintenance of extreme pessimism among Democrats is more surprising.
But while the University of Michigan’s index has shown a decline over the past seven months, consumer confidence measured by The Conference Board by Nielsen currently stands at its 16-year high.
“People often confuse the University of Michigan's Index of Consumer Sentiment and the Conference Board's Consumer Confidence Index,” Frick said. “The Consumer Confidence survey is more job-centric.”
“Since the U.S. employment situation is good, and getting better, we see Consumer Confidence rising,” he said. “The Consumer Sentiment Index doesn't ask about jobs. It's more about how well-off consumers are right now and how they expect they’ll be in the future.”
