U-M Surveys of Consumers: Strong economy amid darkening tariff clouds on the horizon

July 27, 2018

Surveys of ConsumersANN ARBOR—Consumer sentiment was virtually unchanged from last month, and was nearly identical with the average since the start of 2017, according to the University of Michigan Surveys of Consumers.

Despite the expectation of higher inflation and higher interest rates during the year ahead, consumers have kept their confidence at high levels due to favorable job and income prospects, said U-M economist Richard Curtin, director of the surveys.

This mix of positive and negative expectations is similar to past expansions, and, as in the past, it will prevail as long as increases in inflation and interest rate hikes remain modest, Curtin said. All households anticipated income gains of 2.2 percent in the year ahead, with those under age 45 expecting gains of 4.8 percent. The data indicate that real consumer spending should advance by 2.6 percent in the year ahead.

“The unique aspect of the current situation is the potential negative impact of tariffs on the domestic economy,” he said. “The news heard by consumers about tariffs dominated all other aspects of the economy in July. References to tariffs rose significantly in the past month, rising to 35 percent in July from 21 percent in June and 15 percent in May.

“Of course, these negative economic expectations could quickly disappear if the trade issues with Europe are promptly settled and immediately followed by agreements with China, Canada and Mexico. Resolution is critical to forestall decreases in discretionary spending as consumers may begin to take precautionary steps against the potential for a worsening economy.”

Potential Impact of Tariffs

Consumers anticipated a slightly slower pace of economic growth during the year ahead, although the majority of consumers still judged the overall conditions in the economy would remain favorable. Importantly, three-fourths of all consumers expected the unemployment rate to remain at its current low or to inch downward in the
upcoming year.

So far, the greatest impact of prospective tariffs was on vehicles. Vehicle buying plans posted a significant decline in July, falling to its lowest level in five years. Consumers voiced the worst assessment of vehicle prices since early 1997, partly due to fears of tariffs.

Personal Finances Remain Strong

Personal finances remained very favorable as 53 percent of all households cited recent financial gains, just below last month’s 55 percent, with 43 percent specifically mentioning recent income increases, also slightly below last month’s 47 percent.

Gains in net wealth were reported by one-in-five households in the top two-thirds of the income distribution, although small net wealth declines, largely due to increasing household debt, were cited by those in the lowest income third for the first time in more than a year. Rising home values were reported by two-thirds of all homeowners
in July, a figure that has remained largely unchanged over the past six months.

Consumer Sentiment Index

The Consumer Sentiment Index was 97.9 in July 2018, between June’s 98.2 and last July’s 93.4, and nearly identical to its average since the start of 2017 (97.4). The Expectations Index rose to 87.3 in July, up from June’s 86.3 and last July’s 80.5. The Current Conditions Index fell slightly to 114.4 in June, down from 116.5 in June and last July’s 113.4.

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.

Contact: Bernie DeGroat, 734-647-1847, bernied@umich.edu, Surveys of Consumers, 734-763-5224

Surveys of Consumers

U-M Institute for Social Research