Strong Consumer Sentiment Driven by Lower-Income Households

March 29, 2018 by Jon C. Ogg

Source: Thinkstock
The University of Michigan has released its updated consumer sentiment report for March. The month-end report was marginally lower than the mid-month reading, and that is said to be due to uncertainty about the impact of proposed trade tariffs. The Sentiment Index came in at 101.4, and that is still the highest level since 2004. Bloomberg had called for the preliminary reading of 102.0 to remain static.

Also worth noting was that the Current Conditions Index hit 121.2 in March, and that is a new all-time high. The Index of Consumer Expectations ticked down to 88.8 in March from 90.0 in February.

The sentiment report was on the heels of a February report showing that personal income was 1.8% year on year on the PCE Price Index and up 1.6% on the Core PCE Price Index.

What is interesting is where the income gap levels are driving sentiment. The media constantly reports on wage gaps, wage inequality and low pay raises over time. That made it surprising to see that all of the gains in March’s overall sentiment came from households with incomes in the bottom one-third, up 14.1 points. The middle one-third of household incomes were unchanged, and the index fell among those households in the highest one-third of income with a drop of 5.6 points.

In addressing the economic levels, the University of Michigan report said:

Households with incomes in the top third cited significantly greater concerns with government economic policies than last month, especially trade policies, with net references falling from +31 to just +1, offsetting their positive reactions to tax policies.

There is also not much concern over rising interest rates. Consumers do expect that interest rates will increase in the foreseeable future, but consumers still view the current level of interest rates as relatively low. The report said about higher interest rates and spending versus saving:

They understand that interest rate hikes are intended to dampen the future pace of economic growth. Their reaction will both emphasize borrowing-in-advance of those expected increases as well as heighten their precautionary savings motives. The trade-off between spending and saving will crucially depend on the pace of future interest rate hikes compared with the pace of income growth. It is likely that income growth will initially dominate, tilting consumers’ motives more toward spending than saving. Overall, the data are consistent with a growth rate of 2.6% in consumption from mid-2018 to mid-2019.

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