Michigan Consumer Sentiment: The fundamental things apply

American optimism soared to its highest level in 15 years as consumers anticipated that their economic future would be even better than the present. 

The University of Michigan preliminary sentiment index jumped to 102.4 in May, its strongest score since January 2004 and far above analysts’ 97.5 median prediction.  All of the increase was due to the expectations index which at 96.0 also reached a 15 year high, almost ten points above the April’s 87.4 reading.  The forecast had been for a drop to 86.8. The current conditions index rose to 112.4 from 112.3 in April. The final revisions will be released on May 31st.

Reuters

Reuters

The factors most important to consumer’s view of the economy and their household circumstances are as positive as they have been since the financial crisis and recession.

First quarter economic growth surpassed all expectations at 3.2%, a sharp improvement over the fourth quarter’s 2.2%. This helped to alleviate concerns that last year’s declining GDP rate from 4.2% in the second quarter to 2.2 in the fourth was a sign that the tax reform and spending legislation from 2017 had failed to raise the baseline expansion the US economy.

Wages and more tellingly the gains in real wages, nominal corrected for inflation, have reached their best levels in more than two years.

Reuters

The improvement since last summer has been driven by sustained wage increases over 3% and a modest decline in inflation rather than by a large decrease in inflation.  

Improvements in wages in any business cycle are rarely rescinded and from a consumer point of view are far more stable and likely to boost spending and sentiment than any temporary rise in purchasing power brought on by a fall in prices.

Payrolls have resumed a steady creation of new positions. March produced 189,000 jobs and April 263,000. The February slip to 56,000 was the occasional off month that is not-uncommon in this series.  

Reuters

Unemployment at 3.6% and the initial jobless claims 4-week moving averge of 212,250 reinforce what most American understand is the best labor market in 50 years, better in many respects, than the last term of the Clinton administration.  

The US trade confrontation with China began almost 18 months ago and it has had little or no effect on consumer attitudes.

In comparison the government shutdown in late December and January prompted a dramatic drop in consumer optimism which disappeared as soon as the closure ended.  

The break in trade talks with China, though not yet a breakdown of negotiations, is too recent to be reflected in the May Michigan Survey. But even when Americans have had a month or two to contemplate its effects, their opinion is unlikely to change. Unless the trade conflict begins to affect the job market and wages through increasing layoffs, the modest price increases on assorted consumer goods that will be its largest visible effect will be lost in the general economic wellbeing.

Despite the alarm expressed in the May Michigan Survey statement about the “corrosive impact of an escalating trade war,” April’s statement was probably more instructive when it noted that "60% [of respondents] reported…that they expected to be better off financially over the next five years. That was the highest proportion ever recorded.”