Strong Consumer Sentiment Recovery Isn't Just About the End of the Government Shutdown

Consumer sentiment had been expected to recover from January’s lows due to the federal government shutdown, but the University of Michigan’s Surveys of Consumers delivered an even stronger recovery than expected.

The full Consumers Sentiment Index popped to 95.5 in the preliminary February 2019 reading. That was up from 91.2 in January and was above the Wall Street Journal’s consensus estimate of 93.0.

Both components that make up the index posted strong recoveries as well, with the expectations leading the way. The index for current conditions rose to 110.0 in February from 108.8 in January (compared with 114.9 a year ago). The index for consumer expectations rose to 86.2 from 79.9 last month, but this was versus 90.0 a year earlier.

The early February gains reflect the end of the partial government shutdown but also a more fundamental shift in consumer expectations as it is believed that the Federal Reserve is set to pause its quest to keep raising interest rates.

The University of Michigan’s survey said:

The lingering impact of the shutdown was responsible for some of the negative economic evaluations, and, at the time that these interviews were conducted, uncertainty about whether a second shutdown would occur continued to have a slight depressing impact on confidence. Although the majority of consumers expected some additional rate hikes during the year ahead, that proportion has shrunk to the smallest level in the past two years.

On top of the expectation for the Fed to slow interest rates, it was signaled as more important that the long-term inflation expectations of consumers fell to the lowest level recorded in the past half-century.

Nominal income expectations remained at modest levels. That said, consumers were said to more frequently expect gains in their inflation-adjusted incomes in early February than at any other time in more than 15 years. Also shown in the data was that personal consumption expenditures are expected to remain the strongest sector in the overall economy throughout 2019, with a projected gain of 2.7% (versus a GDP gain of 2.2%).

Friday’s stronger than expected consumer sentiment report also noted:

The data suggest that the Fed will find it even harder to justify another rate hike given the record low inflation expectations; the data will also add to the debate about the evolving relationship between unemployment and inflation as consumers now anticipate lower inflation and higher unemployment.

On last look, the Dow Jones industrials were up almost 300 points at 25,736 and the S&P 500 was up 21.31 at 2,767.10. West Texas Intermediate crude oil was up $0.86 per barrel at $55.27, and the yield on the 10-year Treasury was up about a basis point at 2.666%.