Impact of tax reforms on confidence neutralized by tariffs
April 27, 2018
Although the Consumer Sentiment Index fell slightly in April, it has remained at very favorable levels since the start of 2018.
ANN ARBOR—Consumers remain confident that inflation and unemployment will remain low during the year ahead and wages will continue to slowly improve, according to the University of Michigan Surveys of Consumers.
The recent small variation in the Sentiment Index has been due to favorable impact from the tax reforms legislation, which is now being offset by unfavorable views of the proposed trade tariffs, said U-M economist Richard Curtin, director of the surveys.
“Perhaps the best single summary of the current state of confidence is that consumers believe the economy is now ‘as good as it gets,’” he said. “This view recognizes that the current expansion is approaching an all-time record length and the peak in economic conditions is near.”
Overall, the data are consistent with growth rate in personal consumption expenditures of 2.7 percent from mid-2018 to mid-2019.
“While consumers do not anticipate an economic downturn anytime soon, the long expansion has made consumers somewhat apprehensive about future trends,” Curtin said. “Consumers anticipate that higher interest rates will trim the future pace of growth and have become increasingly concerned about the negative impact from tariffs on trade.
“Moreover, there has been a growing gap in the past few years between how consumers judge future economic prospects and how they evaluate the current economy. When this gap grows to extreme levels, the divergence sparks a cyclical downturn. While the gap is not yet at such extremes, the divergence is large enough to spark growing apprehensions about the economy.”
Taxes and Tariffs
Tax reform and trade policies sparked many spontaneous comments, with a positive balance of opinion on the tax reforms and a negative balance of opinion on the trade tariffs. The difference in the Expectation Index was stark: positive views on tax reform had Index values 28 points higher than those who made no mention of the tax reform legislation, and negative views on tariffs had Index values that were 28 points lower than those who didn’t mention trade. As a result, trade policies neutralized the impact of tax reforms on consumer confidence.
Growth Slows but Economy Remains Strong
Fewer consumers anticipated that the pace of economic growth would increase during the year ahead, but half of all consumers still anticipate the continuation of good times in the economy as a whole. April’s survey found just 29 percent who expected an improving pace of growth, down from 42 percent last year.
Nonetheless, when asked about whether the economy would remain satisfactory, half reported that they expected good times to persist. Importantly, just one-in-four consumers expected any increase in unemployment from its current low rate.
Consumer Sentiment Index
The Consumer Sentiment Index was 98.8 in the April 2018 survey, between the 101.4 in March and last April’s 97.0. The Current Conditions Index was 114.9 in April, down
from 121.2 in March, returning to February’s level and just above last April’s 112.7. The Expectations Index was 88.4 in April, barely below March’s 88.8 and last year’s 87.0.
About the Surveys
The Surveys of Consumers is a rotating panel survey based on a nationally representative sample that gives each household in the coterminous U.S. an equal probability of being selected. Interviews are conducted throughout the month by telephone. The minimum monthly change required for significance at the 95-percent level in the Sentiment Index is 4.8 points; for Current and Expectations Index the minimum is 6 points.
Contact: Bernie DeGroat, 734-647-1847, [email protected]
Surveys of Consumers, 734-763-5224