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First Cut: Preliminary January Consumer Sentiment down sharply

The preliminary January University of Michigan Consumer Sentiment Index fell from the 98.3 in December to 90.7, its lowest since 90.0 in July 2016.  The index is still at a level that could be called solid, but the rapid drop is an uncomfortable development, if unsurprising in light of the partial federal government shutdown and contentious issue of building a wall along the US-Mexico border, recent plunges in the stock market, concerns about tariff and trade policy, and signs that the sugar high of the December 2017 tax package are wearing off and the economy is growing more slowly.

The present conditions index fell to 110.0 in January from 116.1 in December. The six-month outlook was down to 78.3 from 87.0. The six-month outlook accounts for about 60% of the index.

The steep drop in consumer confidence may be a bit of a shock to markets since it was not well anticipated. But the reasons are fairly obvious. Given the government shutdown is dragging toward its fourth week, it would not be a surprise to see the index be revised even lower when the final data is reported on February 1 at 10:00 ET.

Inflation expectations were little changed in January from December. The 1-year reading remained at 2.7%, suggesting the impact from lower gasoline prices has leveled off. The 5-year expectations were up a tenth to 2.6%, indicating that consumers continue to expect modest upward price pressure over the medium term. This should provide Fed policymakers with some assurance that inflation expectations are still anchored.

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