ANN ARBOR—The Consumer Sentiment Index reached the highest level since 2004, and the Current Conditions Index set a new peak, dating back to the mid-1940s, according to the University of Michigan Surveys of Consumers.
Importantly, all of the March gain was among households with incomes in the bottom third; those in the middle third were unchanged, while the Index fell among households with incomes in the top third, said U-M economist Richard Curtin, director of the surveys.
Upper income households cited significantly greater concerns about government economic policies, especially trade policies, offsetting their positive reactions to tax policies, he said.
Currently, the main factor driving discretionary spending is that consumers remain confident in their future job and income prospects, which is anchored more in the stability of these economic prospects rather than the size of the expected gains, Curtin said. Overall, the data are consistent with growth rate in personal consumption expenditures of 2.6 percent from mid-2018 to mid-2019.
“The consensus expectation among consumers is that interest rates will increase in the foreseeable future,” Curtin said. “While consumers view the current level of interest rates as still relatively low, they understand that interest rate hikes are intended to dampen the future pace of economic growth.Their reaction will both emphasize borrowing in advance of those expected increases as well as heighten their precautionary savings motives.
“The trade-off between spending and saving will crucially depend on the pace of future interest rate hikes compared with the pace of income growth. It is likely that income growth will initially dominate, tilting consumers’ motives more toward spending than saving.”
Record Financial Progress
Recent financial progress was reported by 57 percent of consumers in March, which tied the 1998 all-time peak. Half of all households cited higher incomes and nearly two-thirds cited rising home values. While these gains were widespread, future financial prospects improved among the lowest income households and declined among the highest-income households. Expected increases in nominal incomes during the year ahead fell to 1.7 percent in March, down from 2.3 percent last year, with most of the decline among households with incomes in the top third.
Economic News Weakens Outlook
Consumers reported more negative news about trade policies, with unfavorable references rising to 31 percent from last month’s 18 percent. While six-in-10 consumers reported that the overall economy had recently improved, half as many anticipated additional gains in the pace of economic growth during the year ahead. The remaining strength was among those with incomes in the bottom third, while losses were recorded among those with incomes in the top third. The same pattern held for expectations about future changes in the unemployment rate.
Consumer Sentiment Index
The Consumer Sentiment Index was 101.4 in the March 2018 survey, up from 99.7 in February and 96.9 in last March’s survey. The Current Conditions Index was 121.2 in March, up from 114.9 in February and last year’s 113.2, reaching the highest level ever recorded. The Expectations Index was 88.8 in March, between last month’s 90.0 and last year’s 86.5.
About the Surveys
The Surveys of Consumers is a rotating panel survey based on a nationally representative sample that gives each household in the coterminous U.S. an equal probability of being selected. Interviews are conducted throughout the month by telephone. The minimum monthly change required for significance at the 95-percent level in the Sentiment Index is 4.8 points; for Current and Expectations Index the minimum is 6 points.
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