Consumer sentiment highest in nearly two years

REAL ECONOMY BLOG | July 14, 2023

Authored by RSM US LLP

Consumer sentiment jumped to its highest level since September 2021 on the heels of continuing disinflation and an improved view of household finances, according to the University of Michigan’s survey on Friday.

The top-line sentiment index increased to 72.6 in July, from 64.4 earlier.

After a long period of dealing with elevated inflation, consumers have begun to better understand the impact of inflation on their everyday lives, while learning to accept the fact that persistent inflation will be around for some time.

That view is reflected in the long-term inflation expectations for the next five to 10 years that have been hovering around 2.9% to 3.1% for about two years.

With concerns over inflation fading, and stock markets rising, consumers are feeling a lot better about their financial situation. The subindex for household finances increased to 95, the highest since early 2022 when the Federal Reserve’s rate hike campaign began.

Improving overall sentiment and confidence about household finances imply that consumers will have more appetite to spend in the months ahead. Spending intentions for major household items, vehicles and new homes all increased on the month, according to the survey.

What is interesting inside the survey is that consumers are expecting more job losses in the next 12 months despite the rise in sentiment. The unemployment index increased to 84, the highest since September. That adds more reason to believe a labor market slowdown will continue.