May 31, 2019 / 3:07 PM / 8 months ago

Column: U.S. consumer confidence critical to economic outlook

LONDON (Reuters) - U.S. consumers are more confident about the outlook for their own finances and the economy than they have been at any time since before the Great Recession, according to survey data from the University of Michigan.

A shopper is seen in the aisle of a Walmart store in Woodstock, Georgia, U.S., June 28, 2018. REUTERS/Nandita Bose/File Photo

Consumer confidence has remained very high despite a raft of other indicators suggesting the rate of economic growth has slowed sharply since the middle of 2018.

But while headline sentiment indicators remain very positive, there are more troubling signs that spending on big ticket items is beginning to stall.

Confidence has a major impact on growth because it influences the timing of major purchases especially housing and durable goods (“Consumer expectations: micro foundations and macro impact”, Curtin, 2019).

Household spending on new homes and durables accounted for around 11 percent of gross domestic product in 2017/18 (“National income and product accounts”, Bureau of Economic Analysis, 2019).

For comparison, business investment on buildings, equipment and software accounted for around 13-14 percent of GDP in the same period.

Consumer and business confidence arguably have a similar-sized impact on the economy and household sentiment can act as a major accelerator of cycle upturns and downturns.

In recent quarters, U.S. business investment has started to slow as firms react to increased uncertainty stemming from the prolonged trade war with China and signs of a broad deceleration in the economy.

So if the current expansion, which will become the longest on record in July, is to be sustained, consumer confidence and spending will have to maintain a very high level for the rest of the year.


The University of Michigan’s monthly survey of consumers is one of the oldest and most cited measures of consumer confidence.

The university’s consumer sentiment index rose to 100.0 in May from 97.2 in April and in recent months has been close to its highest level since the start of 2004.


The index is based on a five-item questionnaire that asks whether the respondent’s family is better off or worse off than a year ago, and whether they expect to be better off or worse off a year from now.

It also asks whether the respondent thinks business conditions and the country as a whole will have good times or bad times financially in the next 12 months and five years respectively.

Finally, respondents are asked whether now is a good time to buy big ticket items such as furniture, a refrigerator, stove or television (“Surveys of consumers: index calculations”, University of Michigan).

Two sub-indices are calculated for current conditions (based on whether families are better or worse off than a year ago, and whether now is a good time to buy big items) and expectations (based on the other three items).

The current conditions index hit a record in March 2018 but has since trended lower, consistent with other indicators that show the economy decelerating since the second or third quarter of 2018.

The expectations index, by contrast, has remained steady, apart from a brief wobble at the end of 2018, and this month climbed to its highest since January 2004.


Consumer optimism stands in marked contrast to the growing fears about an economic slowdown or even a recession among investors evident in the inversion of the U.S. Treasury yield curve.

But research shows most consumers have limited awareness of current economic statistics on unemployment, inflation and GDP growth published by the Bureau of Labor Statistics and the Bureau of Economic Analysis.

“Rather than macro data, people typically base their decisions on ... the strength of the local economy, the change in prices they actually face, and job prospects for people with their same skills and abilities,” according to Richard Curtin at the University of Michigan, who directs the monthly survey.

Consumers’ estimation of current conditions and expectations for the future are based more on their own experiences than on the official nationwide statistics published by federal agencies.

Sentiment is local and based on consumers’ own experience, and on conversations with family, friends and colleagues almost as much as television and the newspapers.

Low unemployment and wage growth especially in manufacturing and among lower-income workers is probably underpinning favourable estimates of current conditions and optimism about the future.


Curtin has also identified an unusually wide and persistent partisan divide in economic expectations since the election of President Donald Trump in 2016.

“Democrats still expect an imminent recession, and Republicans anticipate much more rapid economic growth,” Curtin wrote in a paper last year (“Consumer economic expectations: persistent partisan differences”, September 2018).

Partisan differences in consumer expectations are normal. Republican voters were more optimistic under the administrations of Reagan, GW Bush and Trump, while Democrats were more optimistic under Obama.

But the scale of the shift and its surprising durability and stability has been much larger under Trump. The partisan gap in consumer expectations is more than twice as large as under previous presidents.

“The dramatic shift in expectations following Trump’s election occurred among identical individuals and the recent shift in expectations has been larger than for any prior presidency,” according to Curtin.

The data “demonstrate a selective perception among consumers regarding recent economic developments, with Democrats placing heavy emphasis on negative developments and Republicans on positive developments.”

In May 2019, for example, the consumer sentiment index for all Americans was 100.0, but for self-identified Democrats it was 82.9 while for Republicans it was 119.4.

The consumer expectations component was 93.5 for all Americans, but 71.0 for Democrats and 115.4 for Republicans. Self-identified independent voters occupied an intermediate position between the two parties.


Despite the very high levels of overall confidence reported in the survey, there are already signs consumers are adopting a more cautious approach to large purchases.

Consumer spending on durable goods was up by 2.7% in the first quarter of 2019 compared with the same period in 2018, but year-on-year growth has slowed from 6-7% at the end of 2017 and the start of 2018.

Spending on the construction of new homes and other residential investments fell 3.3% in the first quarter compared with 2018 and residential investment and has been tapering steadily for three years.

Reported confidence, especially expectations, was badly dented in the final quarter of 2018, when U.S. equity markets slumped.

The critical question is whether it can be sustained amid renewed pressure on U.S. equity prices, signs of a global economic slowdown and fears of a prolonged trade war with China.

There are signs that confidence is starting to fall, with sharp downward revisions in both the current conditions and expectations indices in the second half of May.

Hopes for an early settlement of the trade war were replaced by fears about a prolonged standoff and equity prices slumped.

But in a fascinating indication of how partisanship is shaping reactions to economic news, the downward revisions to sentiment in the second half of May were entirely concentrated among Democrats and independents.

Self-identified Republicans became more positive about both the current state of the economy and the outlook for themselves and the country as the month wore on.

John Kemp is a Reuters market analyst. The views expressed are his own.

Editing by David Evans

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