University of Michigan survey: Consumer sentiment rises on better economic outlook.

REAL ECONOMY BLOG | August 12, 2022

Authored by RSM US LLP

U.S. consumer sentiment rose more than expected in August on the back of the sharp drop in gasoline prices, but remains near a record low as consumers shouldered multi-decade-high inflation and continuing economic uncertainty.

The University of Michigan’s monthly consumer sentiment index increased from 51.5 in July to 55.1 in August, according to a preliminary report released Friday. The final report will be released at the end of the month. We expect sentiment to continue to improve toward the end of summer as gasoline prices likely come down further.

However, with recession fears retreating somewhat after the “blockbuster” jobs report last week, it is hard to predict what will happen to oil and gasoline prices in the months ahead.

Underneath the topline, consumers were more pessimistic about current conditions than future expectations; the current condition subindex fell to 55.5 from 58.1 previously and the expectation subindex rose sharply to 54.9 from 47.3. That suggests consumers also expect gasoline prices to come down, and the same for inflation, which likely peaked in June.

Consumers remained sour on the retirement outlook, which has been affected significantly by inflation eating into savings and pension funds. But younger workers see a much brighter future ahead. Their expectation for increases in income rose to 2.1% from only 1.1% previously.

Short-term inflation expectations for the next 12 months also fell to 5% in August from 5.2% the prior month. However, long-term inflation expectations for the next five to 10 years went up slightly to 3% from 2.9%. These indicators are some of the most important inflation expectation gauges that the Federal Reserve watches closely and will feed into the Fed’s common inflation index, thus affecting future rate decisions.

After rising in July as gas prices dropped, buying intentions for major items, vehicles or homes declined in the first half of August. This suggests that while there was some relief in terms of spending on energy, consumers still might not be tempted to spend more on durables and housing, especially while interest rates are elevated.