By: Miles Pearson – Forex Focus
The University of Michigan survey slips to its lowest level since September 2017.
The University of Michigan Preliminary Consumer Sentiment Index slipped to 95.3 in August from July’s final reading of 97.9. The preliminary survey numbers were the lowest since September 2017 and sharply below market consensus of 98.0, as concerns about rising prices, especially in the housing and the automobile sectors, dampened consumers’ views of the economy. The University of Michigan survey is broadly comprised of the indices of consumer sentiment, current economic conditions and consumer expectations. The index tracking current economic conditions declined to 107.8 in August from 114.4 the previous month, while the index measuring consumer expectations remained largely unchanged at 87.3. The survey showed that the fall in consumer sentiment was largely led by households in the bottom third of the income distribution. What the survey indicates is that consumers are not happy with rising inflation, especially when it comes to investments in housing, automobiles and durable goods. While households expect inflation to remain unchanged at 2.9 percent for the rest of the year, their outlook for core inflation for the longer term edged higher to 2.5 percent from 2.4 percent in the previous survey.
Consumer spending accounts for about 70 percent of economic activity in the United States, and the 4-percent annualized rise in consumer spending in the second quarter of this year was a major factor leading the US economy to expand at its fastest pace in almost four years, with the country’s second-quarter gross domestic product (GDP) figures coming in at 4.1 percent, almost doubling from the 2.2-percent growth seen in the first quarter. However, the August survey showed that consumers’ views on home-buying were at their lowest point within the last 10 years, while their perceptions of house prices slipped even further. Likewise, consumers’ views on automobile-buying conditions also slid to four-year lows in August.
According to the survey, “These are extraordinary shifts in price perceptions given that consumers anticipate an inflation rate in the year ahead of 2.9 percent in early August. The data suggest that consumers have become much more sensitive to even relatively low inflation rates than in past decades.”
Inflation in the US has been steadily rising in the last few months on the back of domestic demand led by a strong labour market, which is regarded to be near full employment. Recent unemployment data published by the Bureau of Labour Statistics showed that the unemployment rate in the US slipped further to 3.9 percent in July from 4.0 percent a month earlier, with the number of unemployed persons dropping by 284,000.
Inflation, on the other hand, continued to remain at elevated levels, although the annual inflation rate in July was unchanged at 2.9 percent, the highest since February 2012, while core inflation edged higher to 2.4 percent from 2.3 during the corresponding period. The personal consumption expenditures (PCE) price index—the Federal Reserve System’s preferred inflation measure—came in at an annualized 2.2 percent in June, with the core index at 1.9 percent, both of them unchanged from the previous month’s figures. However, the fears seem to be associated with the implementation of the recent protectionist policies by President Donald Trump’s administration, which has led to a bitter trade war with China—with both countries continuing to be engaged in tit-for-tat import tariffs, driving consumer prices higher.
Going by historical stats, consumer sentiment continues to remain high, but the survey indicates that “consumers have little tolerance for overshooting inflation targets, and to the benefit of the Fed, interest rates now play a more decisive role in purchase decisions”.
The Fed has been gradually lifting interest rates since the second half of 2015. The US central bank has already raised rates twice this year, and as market experts factor in another couple of hikes later this year, consumer borrowing costs are only going to rise. And, unless wage growth registers a proportional increase, the Michigan survey will head in only one direction: south.