The University of Michigan Consumer Sentiment index fell more than expected to 97.8 in the preliminary April reading, down from 101.4 in March. Despite that slippage, the index remains well above its long-term average, indicative of a still optimistic consumer mood and supportive of continued growth in consumer spending.
The collective consumer mood has been persistently optimistic since late 2016, buoyed by a strong labor market, strongly positive stock market returns, and an economy that has picked up steam.
While it remains to be seen how impactful tax reform will be, households are already seeing the impact of lower tax withholding and greater take-home pay. On the corporate side, lower federal tax rates are providing a boost to already surging corporate profits.
A confident consumer sector coupled with greater capacity to spend should provide a solid foundation for the broad economy to continue to grow. With more than two thirds of U.S. economic activity directly tied to consumer spending, the importance of household spending and the consumer sector can’t be overstated.
On the surface, the persistent strength of consumer optimism may be surprising given the increasingly toxic political climate and rising global risks related to trade sanctions, and increasing geopolitical instability relative to North Korea, Syria, and most recently Russia.
Concerns over trade policy in particular is having an effect, with those who acknowledge the issue having a much more cautious outlook. The fact that the threats and actions taken on that front have not yet really been felt by consumers likely dampens the potential effect at this point, although it certainly is a growing risk that could have a much greater effect depending on the path that President Trump and his counterparts among our trading partners, particularly China, take from here.
Rising interest rates and growing inflation pressures also remain a risk that has not been overlooked by consumers, but the impact thus far has been limited.
All things considered, consumers remain very upbeat in their assessment of current economic conditions and cautiously optimistic on the future. While several sources of uncertainty exist, it appears that consumers remain much more focused on the positives than risks that may or may not ultimately come to fruition.
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