The animal spirits are stirring.
In a testament to the notion that Main Street, like Wall Street, is eager to toast the ostensible end of America’s inflation nightmare, the premier gauge of US consumer sentiment topped every estimate from nearly six-dozen economists in the preliminary reading for July.
At 72.6, the headline print on University of Michigan sentiment was the highest since September of 2021. Consensus expected 65.5. The most optimistic guess from 56 forecasters was 68.
The current conditions gauge rose nearly nine points, to 77.5, while the expectations index jumped to 69.4 from 61.5 in June.
The headline index has now reclaimed around half the ground lost from pre-pandemic levels to record lows hit midway through last year.
“The sharp rise in sentiment was largely attributable to the continued slowdown in inflation along with stability in labor markets,” survey director Joanne Hsu said Friday.
The irony is delicious. Or bitter. Depending on how you want to look at. The upturn in sentiment, predicated in part on falling inflation, was accompanied by a renewed rise in inflation expectations, to 3.4% for the year ahead and 3.1% at the five- to 10-year point. The latter matches the cycle high.
Consumers are (inadvertently) confirming concerns raised in these pages all week: As inflation falls, Americans will feel better, and that optimism could translate into more spending, which in turn could drive inflation, or at least sustain it above the Fed’s target on a longer horizon.
I wouldn’t want to make too much of the small uptick in price growth expectations, which could very well be revised lower later this month. But maybe Americans are subconsciously projecting their own spending intentions. (Not really. But maybe!)
On the other hand, you could argue that the combination of a resilient labor market, solid growth and happy consumers suggests the Fed should consider adopting a higher target. Or at least once they prove they can wrestle price growth back down to 2% if they try hard enough.
Oh, there was one cohort of Americans who weren’t feeling especially jubilant early this month. “Sentiment climbed for all demographic groups except for lower-income consumers,” Hsu remarked.
