New tariffs pose threat to confidence

August 2, 2019

ANN ARBOR—Consumer sentiment has been remarkably stable since the start of 2017, despite ongoing trade uncertainties, according to the University of Michigan Surveys of Consumers.

The resilience displayed has been primarily due to a renewed sense of personal financial optimism, said economist Richard Curtin, director of the surveys. Indeed, recent surveys have recorded the most favorable personal financial expectations since May 2003.

Positive job and income prospects, gains in net household wealth and low inflation have all bolstered optimism, he said. At present, consumers do not anticipate a rapid acceleration in income growth rates, nor do they expect significant changes in inflation or unemployment rates during the year ahead.

“Thus far, the impact from higher tariffs has had little impact on consumer purchases and little impact on overall consumer confidence,” Curtin said. “The recently announced tariffs on Chinese imports cover much more commonly purchased consumer items, however, making consumers more aware of the impact of tariffs on their own finances.

“While higher prices will negatively affect spending, the losses should be rather modest. What is more important is how the escalating trade war affects overall consumer confidence. If it sparks a significant rise in economic uncertainty as well as strains on family budgets, the trade war has the potential to make consumers much more cautious spenders than at present.”

More Cautious Spending
Consumers have not ignored mounting economic uncertainties as they have begun to take precautionary measures to increase savings and reduce debt. Although buying attitudes toward homes and vehicles have recently rebounded, they have only reversed a small portion of the losses recorded in the past few years.

Overall, these buying attitudes have remained closer to recession levels than their recent cyclical peaks. The losses have been due to sharp falloffs in judgments about current pricing of homes and vehicles, and have only marginally responded to declining interest rates.

Persistent Strength in Personal Finances
Favorable trends in personal finances remained widespread in July. Recent financial gains were reported by 52% of all households, barely different from last July’s 53%. When asked about their financial prospects for the year ahead, 44% expected financial gains, just below May’s peak of 45%, which was the highest since 2003.

The annual expected gain in household income was 2.3% across all households, up from last month’s 2.0% and last year’s 2.2%. Among households under age 45, the median expected gain in household income was 4.8%, the same as last July’s reading. Real income expectations rose in July to their highest level since the start of 2019.

Consumer Sentiment Index
The Consumer Sentiment Index was 98.4 in the July 2019, just above the 98.2 in June and last July’s 97.9. The Expectations Index was 90.5 in July, only marginally below the
decade high of 93.5 recorded two months ago, in May 2019. The Current Conditions Index was 110.7, between June’s 111.9 and last year’s 114.4.

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.

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Surveys of Consumers

Contact
Bernie DeGroat, 734-647-1847, bernied@umich.edu
Surveys of Consumers, 734-763-5224
U-M has a satellite uplink TV studio and an ISDN radio line for interviews.