July US Consumer Sentiment Declines as Low Earners Become More Concerned

Consumer sentiment in the United States moved lower again in July, despite improving expectations on inflation, according to a national survey on public perceptions of the economy. The Michigan Consumer Sentiment Index, a widely-followed measurement, reached its lowest level since November 2023, reflecting four consecutive months of decline.

Consumer Sentiment and Inflation

The survey director, Joanne Hsu, noted that consumer sentiment over the last three months has remained “virtually unchanged.” While sentiment has lifted 33% above the June 2022 historic low, it remains guarded as high prices continue to drag down attitudes, particularly for those with lower incomes. However, labor market expectations remain relatively stable, providing continued support to consumer spending.

The report also highlighted the differences between high- and low-income earners. High-income earners are generally enthusiastic about the economy, while lower-income cohorts are feeling the heat. Lower-income households are expected to suffer the greatest pain during the upcoming economic slowdown since they haven’t benefited from the run-up in stock prices and housing values to help them weather the pending slowdown in income growth.

While the public continues to feel better about inflation, with year-ahead expectations for price increases dropping for the second straight month, high prices continue to weigh on perceptions about the economy. Despite slowing inflation, consumers appear to remain unhappy with the high level of prices generally, and food prices, in particular. Interest rates remain high and are unlikely to return to pre-pandemic levels in the foreseeable future, making homes unaffordable for many.

The Federal Reserve closely follows consumer inflation expectations, factoring in public sentiment when making decisions on interest rate levels. Gradually diminishing inflation should minimize the risk of an unexpected increase in expectations and help set the stage for a potential September Fed rate cut.

Improving Sentiment Expectations

While the survey has shown elevated consumer pessimism for several months, there are reasons to expect confidence to improve. Gas prices are expected to remain near current levels, interest rates and price levels are trending lower, and the labor market, although slowing, is still strong. Given the still-low level of the index, large gains seem likely at some point. However, the timing of these gains is highly uncertain.

Overall, consumer sentiment in the United States declined in July, with low-income earners becoming more concerned about the state of the economy. While inflation expectations improved, high prices continued to weigh on perceptions. However, if gas prices stay low and the Federal Reserve follows through with interest rate cuts, consumer sentiment stands to improve for everyone.

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