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U.S. Consumer Sentiment Jumps as Tax Cuts Blunt Stock Drop

(Bloomberg) -- U.S. consumer sentiment unexpectedly rose in February to the second-highest level since 2004 as tax cuts and a strong job market helped Americans shrug off stock-market volatility, a University of Michigan survey showed Friday.

Highlights of Michigan Sentiment (February, Preliminary)

  • Sentiment index rose to 99.9 (est. 95.5), highest since October’s 13-year high, from 95.7 in January
  • Current conditions gauge, which measures Americans’ perceptions of their finances, climbed to 115.1 from 110.5
  • Expectations measure advanced to 90.2 from 86.3
  • Year-ahead inflation expectations unchanged at 2.7%

Key Takeaways

The rise in sentiment, which surpassed the forecasts of all analysts surveyed by Bloomberg, comes as Americans’ paychecks are getting bigger due to the implementation of tax cuts under legislation signed by President Donald Trump in December.

The increase is also consistent with data on solid hiring and rising wages released by the Labor Department earlier this month. Some 35 percent of respondents gave favorable references to government policies, matching January as the highest level in more than a half century, according to the report. Most of the positive news involved changes to tax policies and employment gains, while just 6 percent cited negative references to stock prices.

Inflation expectations were unchanged, even after the wage figures sent Treasury yields spiking and started a rout in equities that pushed them into the first correction in two years. Consumers aren’t expecting a sudden surge in inflation, and the fewest consumers in decades cited rising prices as a cause of declining living standards, the report said.

At the same time, rising borrowing costs may limit sentiment in coming months, with the 30-year fixed mortgage rate rising this week to the highest level since 2014. The report said higher interest rates in the year ahead were expected by the biggest share of consumers since 2005.

Official’s Views

“When the tax cut was first passed in late December, the details were largely unknown to the average consumer, and as we’ve moved through January, the details became clearer and employers started adjusting their withholding,” Richard Curtin, director of the University of Michigan consumer survey, said on a Bloomberg conference call. “So I think it is true that this has come because more information is available to consumers about how it would affect their own situation.”

In addition, “consumers now think the labor market is turned in their favor, that they can demand higher wages and they can more easily shift jobs to follow a position that would pay them more,” Curtin said.

What Our Economists Say

A broad-based improvement in income satisfaction and expectations gauges suggests respondents are finally seeing wage growth and anticipate such gains to accelerate in the coming months. While it is unlikely that Americans will reduce their savings rate much further from the cyclically low levels of late, they will likely spend the tax savings, which should support strong personal consumption growth in the first half of this year.

-- Yelena Shulyatyeva and Carl Riccadonna, Bloomberg Economics

Read more here for the full reaction note.

Other Details

  • Inflation rate over next five to 10 years seen at 2.5 percent, unchanged from January
  • Homeowners saying it’s a good time to sell rose to highest in a decade; respondents see 2 percent increase in home values in year ahead, highest since 2007
  • Fewest consumers in decades mentioned favorable impact of low prices and interest rates on buying plans; instead, consumers are basing discretionary purchases on income, job security

©2018 Bloomberg L.P.

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