In July, consumer sentiment regarding the U.S. economy remained at an eight-month low, reflecting ongoing concerns about inflation and its impact on households, particularly those with lower incomes. According to the University of Michigan’s consumer sentiment index, the final reading for July slightly increased to 66.4 from a preliminary 66.0 earlier in the month. Despite this minor improvement, the index has declined for four consecutive months and is currently at its weakest level since last winter.
This index is a significant indicator of consumer confidence, capturing how people feel about the economy’s current state and their expectations for the future. The July reading is notably below the pre-pandemic high of 101 recorded in February 2020. This drop illustrates the persistent challenges faced by consumers amid a turbulent economic environment.
Joanne Hsu, the director of the consumer sentiment index, attributed the low sentiment primarily to ongoing high prices. She also noted that uncertainty surrounding the upcoming presidential election could contribute to further fluctuations in economic attitudes as the political landscape evolves.
Consumers’ expectations for inflation remain cautious. The current inflation rate, based on the Consumer Price Index (CPI), stands at 3%. Consumers anticipate a slight easing in inflation to 2.9% over the next year. This expectation highlights a belief that while inflation is still a concern, there may be gradual improvements in the cost of living.
The sentiment index includes various components that reflect different aspects of consumer attitudes. The gauge measuring perceptions of the current economic situation fell to 62.7 in July, marking its lowest level in 19 months. This decline indicates growing discontent with the present economic conditions. Conversely, the index measuring expectations for the next six months was somewhat higher at 68.8, suggesting that while consumers are wary of current challenges, they hold a more optimistic outlook for the near future.
Although inflation rates have stabilized and are no longer accelerating as rapidly as they once were, they continue to be a significant issue for consumers. Higher prices for goods and services have strained household budgets, particularly for lower-income families. However, there is a glimmer of hope for relief through potential reductions in interest rates. The Federal Reserve is expected to lower borrowing costs in response to the easing inflationary pressures, which could provide a boost to home buyers, car buyers, and individuals seeking loans.
Oren Klatchkin, a financial market economist at Nationwide, highlighted a notable divergence in consumer sentiment between high-income and low-income earners. High-income individuals generally exhibit more positive attitudes toward the economy, while those with lower incomes are experiencing more acute financial strain due to rising prices.
In response to the broader economic situation, the stock market showed some signs of recovery. The Dow Jones Industrial Average and the S&P 500 both experienced gains in Friday’s trading, attempting to rebound from recent losses. This uptick in the stock market reflects a cautious optimism among investors, despite the ongoing economic challenges.
Overall, the July consumer sentiment report underscores the significant economic pressures faced by lower-income households and the broader difficulties within the U.S. economy. As inflation remains a critical issue, the anticipated adjustments in interest rates may provide some relief, though uncertainty about the political and economic landscape continues to influence consumer and market confidence.