The University of Michigan’s Consumer Sentiment index fell more than expected to 92.1 in the preliminary August reading, dipping to its lowest point this year. Despite that decline, the index remains well above its long-term average and generally indicative of a reasonably optimistic consumer sector.
Consumers are acutely aware of the growing risk presented by trade tariffs and the Fed’s recent decision to cut rates. Even if that rate cut was intended to provide some reassurance that the central bank stands ready to safeguard the expansion, consumers read it as an acknowledgement that recession risk has risen, giving them reason for pause.
Even the Fed’s action – clearly intended to support the economy – was viewed by many consumers as a reason to retrench on spending. If that reaction becomes too widespread, further rate cuts could actually exacerbate the fraying of consumer sentiment and accelerate the slowdown.
In a certain sense, the Fed may be stuck. Many perceive the Fed to already be behind the curve….the futures market is pricing in multiple cuts in the coming months. Still, an aggressive response by the central bank to slash rates more rapidly could be viewed by consumers as a negative signal for the near-term outlook. A fading of animal spirits and a loss of confidence on the part of consumers could make the Fed’s job much more difficult, and diminish the benefits that rate cuts could otherwise provide.
On a positive note, strong job market conditions provide a solid foundation under the consumer sector. Stronger wage growth could provide an additional boost, but has been elusive.
Most data still points to an economy that is slowing, but still growing. A prolonged downturn in consumer sentiment would present an additional challenge to growth. At current sentiment levels, that risk still appears limited. Still, the collective consumer mood will merit watching in the months ahead.
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