Consumer sentiment reached its highest level since March, driven by easing gas prices. The final July reading for the University of Michigan Consumer Sentiment Index came in at 55.2. This marks a 15.7% (7.5 points) increase from June and beat the preliminary reading of 54.4. Despite the improvement, consumer sentiment sits 10.5% below where it was a year ago and is currently at the 2nd percentile in the series' history.
Key Takeaways
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The University of Michigan Consumer Sentiment Index rose to 55.2 in July, an 11.5% increase from June.
- The Current Economic Conditions Index rose 14.9% to 54.8, while the Consumer Expectations Index grew 9.3% to 55.4.
- Year-ahead inflation expectations declined to 4.2% from 4.6% in June.
Joanne Hsu, the director of surveys, made the following comments:
Consumer sentiment confirmed its early-month reading, landing almost 12% above June. Broad-based improvements were seen across all groups by income, education, wealth, age, and political party. Five-year expected business conditions reached a 12-month high, though it remains well under its historical average. Despite recent gains, sentiment is 11% below a year ago, reflecting a generally somber view of the economy amid five years of elevated inflation and persistent high prices. Consumers remain focused on pocketbook issues like purchasing power, while political or military developments remain more in the background. Interviews for this release spanned June 23 to July 27.
Background on the University of Michigan Consumer Sentiment Index
The Michigan Consumer Sentiment Index is a monthly survey of consumer confidence levels in the U.S. with regards to the economy, personal finances, business conditions, and buying conditions, conducted by the University of Michigan. There are two reports released each month; a preliminary report released mid-month and a final report released at the end of the month.
The chart below provides a long-term perspective on this widely watched indicator. We have highlighted the index's value at the start of each recession. The current level of 55.2 is below the index's value at the start of all six recessions since its inception.
To put today’s report in historical context, consumer sentiment is currently 34.1% below its average reading of 83.8 (arithmetic mean) and 33.1% below its geometric mean of 82.5, based on data dating back to 1978.
To visualize the volatility and its impact on the broader economy, the following chart includes a three-month moving average and real GDP. Historically, prolonged periods where the moving average remains at these depressed levels have closely correlated with negative GDP growth (the red bars below).
The Political and Presidential Lens of Consumer Sentiment
Each month, the survey results highlight sentiment within each political party. Sentiment is often viewed through a partisan lens, but the data shows that sentiment has fluctuated both positively and negatively under both Republican and Democratic administrations. As the chart below illustrates, the current "plunge" is a rare moment of bipartisan agreement, with declines seen across the political spectrum as energy costs hit every household.
University of Michigan Consumer Sentiment Index: Components
The Michigan Consumer Sentiment Index consists of two sub-indexes: the Current Economic Conditions Index (CECI) and the Consumer Expectations Index (CEI). The CECI reflects consumers' views of their current financial situation and the overall economy, while the CEI gauges their outlook for the future.
Current Economic Conditions Index (CECI)
The Current Economic Conditions Index increased to 54.8. This represents a 14.9% increase from the previous month but a 19.4% drop from a year ago. The latest reading was higher than the forecast of 54.9.
Consumer Expectations Index (CEI)
The Consumer Expectations Index rose for a second straight month to 55.4. This represents a 9.3% increase from the previous month but a 4.0% drop from one year ago. The latest reading was higher than the forecast of 54.0.
University of Michigan Consumer Sentiment Index: Inflation Expectations
Year-ahead inflation expectations ticked down from 4.6% in June to a still-elevated 4.2% this month. The current reading substantially exceeds the 3.4% seen in February before the Iran conflict began, along with all 2024 readings. Long-run inflation expectations held steady from last month at 3.3%, remaining a bit higher than the 2.8% to 3.2% range seen in 2024.
The next update to this report will be published on August 30th.
Other Sentiment Indicators
For an additional perspective on consumer attitudes, see the most recent Conference Board's Consumer Confidence Index. Both indexes gauge consumer attitudes toward the current and future strength of the economy. However, the Consumer Confidence Index is more influenced by employment and labor market conditions while the Michigan Sentiment Index is more focused on household finances and the impact of inflation.
The Conference Board index is the more volatile of the two, but the broad pattern and general trends have been remarkably similar to the Michigan index.
And finally, the prevailing mood of the Michigan survey is also similar to the mood of small business owners, as captured by the NFIB business optimism Index (monthly update here).
ETFs associated with sentiment include: Consumer Discretionary Select Sector SPDR Fund (XLY).
Read more updates by Jen Nash
