The University of Michigan Consumer Sentiment Index edged lower in July, coming in at 93.3 and falling short of economist expectations for a 96.0 according to Bloomberg.
The decline was a result in somewhat diminished assessment of the two underlying components, as consumers were moderately less positive about both current economic conditions and expectations for the coming months.
Despite the decline, consumer sentiment remains relatively high, reflective of continued improvement in job market conditions, limited inflation, and an economy that appears to have re-gathered some momentum after stumbling out of the gate early this year.
Recent stock market volatility, increasing gas prices, and the most recent tensions around the ongoing debt crisis in Greece were likely the key drivers of the drop. Most economic data in the U.S. has been pointing toward a recovery in growth in recent months, which would otherwise be expected to be supportive of the mood of consumers. With recent tensions in Europe and capital market volatility subsiding, further erosion in sentiment may be limited, absent the emergence of other factors.
June retail sales were a disappointment, raising some concerns about how tightly consumers are watching their spending habits. Wage growth remains lackluster, although some data points to the potential for wage pressure to increase if job creation continues at its recent clip and the unemployment rate continues its gradual decline.
Stronger wage growth, coupled with a positive outlook on economic conditions and their personal financial situations, should be an effective combination to drive consumer spending. Should a more persistent “virtuous cycle” of wage growth, confidence, and spending develop, top-line economic growth should benefit as well, providing an easier path for the Fed to begin raising interest rates after a series of false starts and delays in recent years.
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