Erratic Policies Pummel Consumer Sentiment in Early August

The preliminary August results from the University of Michigan Surveys of Consumers show overall consumer sentiment fell sharply from the final July result. Consumer sentiment fell to 92.1 in early August, down from 98.4 in July, a 6.4 percent decline (see chart). From a year ago, the index is down 4.3 percent. The result is the second-lowest since 2016. Despite the decline for the month, sentiment is holding above levels associated with recession.

The two sub-indexes were both lower in August. First, the current-economic-conditions index fell to 107.4 from 110.7 in July (see chart). That is a 3.0 percent drop for the month and a 2.6 percent decrease from August 2018. It is also the lowest level since November 2016 (see chart).

The second sub-index — that of consumer expectations, one of the AIER leading indicators — fell 9.1 percent for the month and now shows a 5.5 percent loss from the prior year. The index came in at 82.3 in August versus 90.5 in July.

Erratic policies out of Washington were a main cause of the drops. According to the report:

Monetary and trade policies have heightened consumer uncertainty — but not pessimism — about their future financial prospects.

With regard to trade policies, the report notes:

Consumers strongly reacted to the proposed September increase in tariffs on Chinese imports, spontaneously cited by 33% of all consumers in early August, barely below the recent peak of 37%. Although the announced delay until Christmas postpones its negative impact on consumer prices, it still raises concerns about future price increases.

In reaction to monetary policy and the recent interest rate cut:

The main takeaway for consumers from the first cut in interest rates in a decade was to increase apprehensions about a possible recession. Consumers concluded, following the Fed’s lead, that they may need to reduce spending in anticipation of a potential recession.

On the positive side, the report points out:

Perhaps the most important remaining pillar of strength for consumer spending is favorable job and income prospects, although the August survey indicated some concerns about the future pace of income and job gains.

Their conclusion based on the survey results:

It is likely that consumers will reduce their pace of spending while keeping the economy out of recession at least through mid 2020.

Overall, consumer sentiment remains above levels associated with recession. However, rising tariffs and erratic trade policy along with a change in monetary policy are impacting attitudes. The crucial questions are to what extent consumers will alter spending and whether businesses will alter hiring and investment in the face of tariffs, actual and threatened.