Economic Concerns Send U.S. Consumer Mood to Seven-Month Low

(Bloomberg) --

U.S. consumer sentiment plummeted to a seven-month low in August on growing concerns about the economy even as the labor market shows few signs of weakening from robust levels.

The University of Michigan’s preliminary sentiment index slumped to 92.1 from July’s 98.4, missing all forecasts in Bloomberg’s survey of economists. The gauge of current conditions decreased to 107.4 while the expectations index dropped to 82.3, bringing both readings to the lowest levels since early this year.

Key Insights

• The second-lowest confidence reading of Donald Trump’s presidency shows consumer spending, the biggest part of the economy and largest driver of expansion in the second quarter, may be at risk of wobbling amid financial-market volatility and the trade war. A weakening in that pillar of support, if sustained over time, has the potential of suppressing economic growth or worse, bringing an end to the record economic expansion.
• The biggest drop in confidence since January underscores how growing odds of a recession before the 2020 election threaten to dim Trump’s chances of winning a second term. Measures of consumer sentiment by political party showed that confidence for Republicans fell to the lowest of Trump’s term. Readings for independents dropped while those for Democrats improved.
• Consumers “strongly reacted” to the proposed increases in tariffs on Chinese goods, a subject that was spontaneously cited by 33% of those surveyed, near the recent peak of 37%, according to the report. Americans also concluded, following the Federal Reserve’s first interest-rate cut in a decade, that they may need to be more cautious about spending in anticipation of a potential recession, the report said.
• The July 31-Aug. 14 survey period corresponded with an especially volatile period: The Fed rate cut, Trump raised tariffs on consumer goods from China then delayed some, and signs of global malaise multiplied.
• Markets convulsed in those two weeks. U.S. stocks posted their two steepest drops of the year while yields on 30- year Treasury bonds fell to record low and 10-year yields dipped below the two-year in a harbinger of recession in the next 18 months.

Official’s View

“The main takeaway for consumers from the first cut in interest rates in a decade was to increase apprehensions about a possible recession,” Richard Curtin, director of the University of Michigan consumer survey, said in a statement. “Consumers concluded, following the Fed’s lead, that they may need to adopt a precautionary spending outlook in anticipation of a potential recession.”

Curtin said on conference call after the release that some of those surveyed mentioned recent stock-market declines but not enough to significantly affect the overall result. “It’s likely that this will have a bigger impact on how people will judge their household wealth going forward and I would anticipate this to be a drag,” he said.

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• The Michigan data follow the Bloomberg Consumer Comfort Index’s second-straight drop in the week ended Aug. 11, marking the largest back-to-back slide since 2011. The Conference Board’s confidence gauge rebounded in July to near the best level in 18 years.
• Consumer expectations for inflation rose, climbing to 2.7% from 2.6% for the coming year and increasing to 2.6% from 2.5% for the next five years. The inflation readings follow findings released earlier this week in the New York Fed’s Survey of Consumer Expectations, showing three-year inflation expectations slipped to a two-year low of 2.6% in July.
• A measure of buying conditions for household durable goods fell to the lowest since 2015. Expectations for personal finances retreated from the best level since 2003.

--With assistance from Alexandre Tanzi and Kristy Scheuble.

To contact the reporter on this story: Ryan Haar in Washington at rhaar3@bloomberg.net

To contact the editors responsible for this story: Scott Lanman at slanman@bloomberg.net, Jeff Kearns, Vince Golle

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