Consumer optimism slipped modestly in recent weeks, as the collective assessment of current economic conditions diminished. The University of Michigan Consumer Sentiment Index edged fractionally lower in August to 89.8 from 90.0 in July, falling short of expectations for a moderate increase.
The Index of Consumer Expectations rose to 78.7, suggesting that consumers were slightly less pessimistic about the future. Relative to a year ago, however, the Index remains down, indicative of some persistent skepticism about the future.
Nonetheless, the overall consumer mood remains relatively upbeat, as solid – and still improving – labor market conditions, low inflation, and better household balance sheets are supporting not only a generally optimistic outlook about the present, but renewed strength in consumer spending in recent months.
Today’s report on Q2 GDP reinforced the latter point, as personal consumption grew by 4.4% during the quarter, anchoring an otherwise lackluster quarter. Business investment, housing, inventory drawdowns, and tighter spending by state and local governments were all headwinds to the economy during the second quarter, but brisk consumption – particularly on goods – was the critical support to the economy’s 1.1% advance.
With the critical stretch run in the Presidential race now at the doorstep, the country’s attention will increasingly focus on the candidates, their policies, and the polls. Will the Fed take action at the September FOMC meeting or defer a potential rate hike until December? Expectations have shifted again in recent days, and a modest increase in the fund’s rate before the election is viewed as increasingly possible once again.
How these issues will impact sentiment in the near-term remains to be seen, but both have the potential to be a catalyst for market volatility and for some slippage in the collective consumer mood. At the same time, the strength of recent spending trends and strengthening wage gains should remain supportive of spending growth and the economy as a whole.