Liberty Street Scene in Ann Arbor — Davel5957

Consumer sentiment was essentially unchanged for a fourth straight month according to the preliminary August report for the Michigan Consumer Sentiment Index. The index rose 1.4 points (2.1%) from July’s final reading to 66.4. The latest reading was above the forecast of 66.7.

The Michigan Consumer Sentiment Index is a monthly survey of consumer confidence levels in the U.S. with regard to the economy, personal finances, business conditions, and buying conditions, conducted by the University of Michigan. There are two reports released each month; a preliminary report released mid-month and a final report released at the end of the month.

Joanne Hsu, the director of surveys, made the following comments:

Consumer sentiment was essentially unchanged for the fourth consecutive month, inching up 1.4 index points. With election developments dominating headlines this month, sentiment for Democrats climbed 6% in the wake of Harris replacing Biden as the Democratic nominee for president. For Republicans, sentiment moved in the opposite direction, falling 5% this month. Sentiment of Independents, who remain in the middle, rose 3%. The survey shows that 41% of consumers believe that Harris is the better candidate for the economy, while 38% chose Trump. In comparison, between May and July, Trump had a 5-point advantage over Biden on the economy. Overall, expectations strengthened for both personal finances and the five-year economic outlook, which reached its highest reading in four months, consistent with the fact that election developments can influence future expectations but are unlikely to alter current assessments. Survey responses generally incorporate who, at the moment, consumers expect the next president will be. Some consumers note that if their election expectations do not come to pass, their expected trajectory of the economy would be entirely different. Hence, consumer expectations are subject to change as the presidential campaign comes into greater focus, even as consumers expect that inflation-still their top concern-will continue stabilizing.

Year-ahead inflation expectations came in at 2.9% for the second straight month. These expectations ranged between 2.3 to 3.0% in the two years prior to the pandemic. Long-run inflation expectations came in at 3.0%, unchanged from that last five months. These expectations remain somewhat elevated relative to the 2.2-2.6% range seen in the two years pre-pandemic.

See the chart below for a long-term perspective on this widely watched indicator. We’ve highlighted the value of the index at the start of each recession and also included a callout to the most recent 12 months. The current level of 67.8 is below the index’s level at the start of 5 of the 6 recessions since the index’s inception.

To put today’s report into the larger historical context, since its beginning in 1978, consumer sentiment is 20.0% below its average reading (arithmetic mean) of 84.8 and 19.0% below its geometric mean of 83.7. The current index level is at the 14th percentile of the 560 monthly data points in this series.

This indicator is somewhat volatile, with a 3.1 point absolute average monthly change. The latest data point saw a 1.4 point decrease from the previous month. For a visual sense of the volatility, here is a chart with the monthly data and a three-month moving average. The bottom half of the chart shows real GDP to help us evaluate the correlation between the Michigan Consumer Sentiment Index and the broader economy.

Other Sentiment Indicators

For an additional perspective on consumer attitudes, see the most recent Conference Board’s Consumer Confidence Index. Both indexes gauge consumer attitudes toward the current and future strength of the economy. However, the Consumer Confidence Index is more influenced by employment and labor market conditions, while the Michigan Sentiment Index is more focused on household finances and the impact of inflation.

The Conference Board index is the more volatile of the two, but the broad pattern and general trends have been remarkably similar to the Michigan index.

And finally, the prevailing mood of the Michigan survey is also similar to the mood of small business owners, as captured by the NFIB business optimism Index (monthly update here).