Consumer Sentiment Recedes, “Persistent Strength” Remains

The Survey of Consumers, a closely-watched gauge of consumer sentiment, continued to recede in January although the index “recorded persistent strength” in key areas.

“While the preliminary January reading for the Sentiment Index was largely unchanged from last month (-1.5%), consumers evaluated current economic conditions less favorably (-4.6%),” Richard Curtain, Surveys of Consumers chief economist said. “This small decrease in current conditions produced a small overall decline.”

The Index of Consumer Expectations is up 0.5 to a very healthy 84.4.

“Importantly, the survey recorded persistent strength in personal finances and buying plans, while favorable levels of buying conditions for household durables have receded to preholiday levels in early January, largely due to less attractive pricing. The Expectations Index remained virtually unchanged at 84.8. Tax reform was spontaneously mentioned by 34% of all respondents; 70% of those who mentioned tax reform thought the impact would be positive, and 18% said it would be negative.”

In another positive, inflation expectations are finally beginning to move in the right direction, albeit slowly. Year-ahead expectations are up 1 tenth to 2.8% from final December which matches December’s preliminary reading as the best showing in almost 2 years.

“The disconnect between the future outlook assessment and the largely positive view of the tax reform is due to uncertainties about the delayed impact of the tax reforms on the consumers,” Mr. Curtain also said. “Some of the uncertainty is related to how much a cut or an increase people, especially high income households who live in high-tax states, face.”

Five-year inflation expectations are also up 1 tenth, to 2.5%.

“Near and long term gas price expectations inched upward in early January but remained significantly below their peak,” Mr. Curtain added. “While long term inflation expectation remained at its 2017 average level and short term inflation expectation inched upward, consumers continued to remain very optimistic about the low national unemployment rate.”

The consumer sentiment survey has consistently shown less enthusiasm than the monthly Consumer Confidence Index and the weekly Consumer Comfort Index, both of which remain near 17-year highs.