Consumer sentiment remained at a record low in early July

Preliminary July results from the University of Michigan consumer survey show that overall consumer sentiment picked up in early July, but remains near a record low (see first chart). The composite consumer sentiment index rose to 51.1 in early July from a record low of 50.0 in June, up 1.1 points or 2.2 percent. The index is consistent with previous recessions.

The index of current economic conditions rose to 57.1 from a record low of 53.8 in June (see first chart). This is 3.3 points or 6.1% more for the month. The index is slightly above a record low but remains in line with previous recessions.

The second sub-index – consumer expectations, one of the AIER’s leading indicators – lost 0.2 points or 0.4% over the month, dropping to 47.3 (see first chart). The index is at its lowest level since May 1980.

According to the report, “consumer sentiment remained virtually unchanged, remaining close to historic lows. Current personal finance estimates continued to deteriorate, reaching their lowest level since 2011.” The report goes on to add: “Conditions for durable goods purchases are adjusted upwards both by consumers who cited an easing of supply restrictions and by those who believe they should buy now to avoid rising prices in the future, exacerbating inflation in the future.” . Even with the adjustment, the terms of purchase remained 26% lower than a year ago.”

Annual inflation expectations fell to 5.2 percent in early July. This is the second decline in the last three months after 5.4 percent were recorded in March and April. Annual expectations have exceeded 3.5% several times since 2005, but then fell again (see second chart).

Five-year inflation expectations fell to 2.8 percent in early July. This result is the lowest since July 2021 and leaves it near the middle of the 25-year range of 2.2 to 3.5 percent (see second chart).

The report states: “Consumers continue to accept the detrimental effect of prices on their personal finances. The share of consumers who blame inflation for undermining their standard of living continued to rise to 49%, the highest level reached during the Great Recession. These negative views have persisted amid the recent decline in gas prices at gas stations.”

The report adds: “Inflationary uncertainty continued to rise, with 26% of consumers expecting prices to stay the same or fall over the next 5-10 years, up from 11% a year ago.”

The fall in consumer sentiment reflects a confluence of events with inflation leading the pack. Persistently elevated rates of price growth affect consumer and business decision-making and distort economic activity. Overall, economic risks remain elevated due to the impact of inflation, a deepening Fed tightening cycle, the ongoing fallout from the Russian invasion of Ukraine, waves of new Covid-19 infections and lockdowns in China. An increase in negative political publicity as the July midterm elections approach could also weigh on consumer sentiment in the coming months. The overall economic outlook remains highly uncertain. The caution is justified.

Robert Hughes

Bob Hughes

Robert Hughes joined AIER in 2013 after over 25 years of economic and financial market research on Wall Street. Bob previously led the Global Equity Strategy division of Brown Brothers Harriman, where he developed an equity investment strategy that combines macro downside analysis with upside fundamentals.

Prior to joining BBH, Bob was Senior Equity Strategist at State Street Global Markets, Senior Economic Strategist at Prudential Equity Group, and Senior Economist and Financial Markets Analyst at Citicorp Investment Services. Bob holds an MA in Economics from Fordham University and a BA in Business from Lehigh University.

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