Job, income gains offset rising inflation, interest rates

June 29, 2018
Contact: Bernie DeGroat bernied@umich.edu

ANN ARBOR—Consumer sentiment has been virtually unchanged for the past three months and has shown only small and insignificant variations during the past 18 months, according to the University of Michigan Surveys of Consumers.

The persistent strength has been due to favorable assessments of jobs and incomes, said U-M economist Richard Curtin, director of the surveys.

While consumers anticipate rising interest rates during the year ahead, those expected increases are associated with a modest decline in longer term prospects for the national economy and not viewed as a barrier to economic growth during the year ahead, he said. Importantly, consumers expect the economy to continue to produce new jobs and for the unemployment rate to inch down from its already low level.

“The potential impact of tariffs on the domestic economy was spontaneously cited by one-in-four consumers, with most expecting a negative impact on the domestic economy (21 percent out of 26 percent),” Curtin said. “The primary concerns were a downshift in the future pace of economic growth and an uptick in inflation.

“To be sure, consumers’ judgments about the impact of higher tariffs will not crystalize until they have experienced actual changes in product prices and heard about changes in employment. While tariffs may have a direct impact on only a very small portion of overall GDP, the negative impact could quickly generalize and produce a widespread decline in consumer confidence and optimism.”

Higher Inflation Expected
Consumers anticipate a rising inflation rate in the year ahead but do not anticipate that it would lead to further escalation in the years ahead. For the year ahead, consumers expect an inflation rate of 3.0 percent in June, up from 2.6 percent last June. The increases are due to rising energy prices and partly due to new tariffs.

When asked about inflation prospects over the next five years or so, consumers expect an annual inflation rate of 2.6 percent in June, barely above the 2.5 percent recorded in the prior five months. Other indicators also suggest that consumers anticipate the rise in inflation to be temporary, including the impact of inflation on personal finances and buying plans.

Widespread Income Gains
The June survey recorded the long-awaited rise in wages as consumers anticipate an annual gain of 2.5 percent in household incomes, up from 1.6 percent in May, and the highest rate of increases in incomes since 2008. Younger consumers expect more rapid increases in wages, as those under 45 anticipate income gains of 4.6 percent in June.

Moreover, when asked to describe how their current finances had changed, 47 percent of consumers report income gains, the highest proportion since mid-1966. Just one-in-10 households in the June survey anticipate that their financial situation would worsen during the year ahead.

Consumer Sentiment Index
The Consumer Sentiment Index was 98.2 in the June 2018 survey, insignificantly different from May’s 98.0 or April’s 98.8 and above last year’s 95.0. The Current Conditions Index rose to 116.5 in June from 111.8 in May and last June’s 112.4. The Expectations Index fell to 86.3 in June from 89.1 in May, but was above last June’s 83.8.

About the Surveys
The Surveys of Consumers is a rotating panel survey based on a nationally representative sample that gives each household in the coterminous U.S. an equal probability of being selected. Interviews are conducted throughout the month by telephone. The minimum monthly change required for significance at the 95-percent level in the Sentiment Index is 4.8 points; for Current and Expectations Index the minimum is 6 points.

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