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First Cut: Final University of Michigan Consumer Sentiment Index revised up, but still lowest since September 2016

The University of Michigan Consumer Sentiment Index for January eked out an upward revision to 91.2 (previously 90.7) although it reflected a lower reading for current conditions 108.8 (previously 110.0) compared to improved six-month expectations 79.9 (previously 78.3). However, it was still sharply below the 97.5 in the December report.

It is possible to draw a direct line between the fall in confidence and the federal government funding impasse that led to the 35-day partial shutdown. There may be a limited increase in sentiment in the index for February, but with the potential for another shutdown looming after February 15, it could be small. Certainly, the alternatives don’t look promising. If Congress manages to cobble together a veto-proof compromise and avert a shutdown, it is entirely possible President Trump will retaliate with an executive order declaring an emergency to build the wall. Should that be the case, it will lead to paralyzing legal challenges and protests. If there is an agreement in Congress that the President can veto, another shutdown will go into effect. Neither is a desirable outcome, and one or the other will further hurt consumer confidence.

Inflation expectations were little changed in January. The one-year measure remained at an unrevised 2.7% from December and still consistent with a stable inflation outlook in the near term. The five-year measure nudged up to an unrevised 2.6% in January after 2.5% in December and remains in a narrow range for the medium term that is also consistent with stable prices. Fed policymakers will have nothing here to distribute their inflation forecasts or approach to monetary policy.

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