August 21, 2017 Reading Time: 2 minutes

The Index of Consumer Sentiment from the University of Michigan rose in early August, driven by a jump in expectations about the future of the economy. The overall index came in at 97.6 in the first half of August versus 93.4 at the end of July, a rise of 4.5 percent. From a year ago, the index posted an 8.7 percent rise. The sub-index for current economic conditions fell 2.1 percent to 111.0 from 113.4 while the sub-index of consumer expectations jumped 10.6 percent to 89.0 from 80.5 at the end of July. From a year ago, the sub-indexes are up 3.7 percent and 13.1 percent respectively.

Consumers have generally had rising confidence over the past several years as economic growth continued and the labor market tightened. Consumer sentiment jumped following the presidential election in 2016 though the results fell heavily along partisan lines. However, dysfunction in Washington, political and social events such as protests, and violence such as terrorist attacks often influence sentiment readings. As Richard Curtin, chief economist for the University of Michigan’s Survey of Consumers noted:

Too few interviews were conducted following Charlottesville to assess how much it will weaken consumers’ economic assessments. The fallout is likely to reverse the improvement in economic expectations recorded across all political affiliations in early August. Moreover, the Charlottesville aftermath is more likely to weaken the economic expectations of Republicans, since prospects for Trump’s economic policy agenda have diminished. Nonetheless, the partisan difference between the optimism of Republicans and the pessimism of Democrats is still likely to persist, with Independents remaining as the bellwether group. At this point, the data continue to indicate a gain of 2.4% in personal consumption expenditures in 2017.

Overall, sentiment should continue to be supported by ongoing economic growth and a robust jobs market, but setbacks along the way are likely.

The solid, though not spectacular, performance of the economy is providing a base for consumer sentiment. That economic performance was confirmed by readings in the Federal Reserve Bank of Chicago’s National Activity Index for July. The index is constructed from 85 economic indicators, where a reading of zero implies trend growth in the economy. The index registered a reading of −0.01 in July, essentially zero, suggesting the economy grew at its long-run trend rate for the month. The index was down from 0.16 in June, indicating a bit of a deceleration for the month.

The three-month average in the FRB’s index, used to help reduce monthly volatility in the data, came in at −0.05, down from 0.09 in June. According to the Chicago Fed, historically, following a period of economic expansion, an increasing likelihood of a recession has historically been associated with a three-month average below −0.70. Conversely, following a period of economic contraction, an increasing likelihood of an expansion has historically been associated with a three-month average above −0.70, and a significant likelihood of an expansion has historically been associated with a three-month average above +0.20. With the three-month average close to zero, the index suggests continued expansion.

Robert Hughes

Bob Hughes

Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.

Get notified of new articles from Robert Hughes and AIER.