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First Cut: Preliminary May University of Michigan Consumer Sentiment Index peaks at 15-year high, but survey taken before the tariff news

The preliminary University of Michigan Consumer Sentiment Index for May reached 102.4, its highest since early in 2004. The 5.2 point jump from 97.2 in April was almost entirely due to an 8.6 point rise in six month expectations to 96.0, also the highest since early 2004. The component for current conditions were virtually unchanged at 112.4 in May from 112.3 in April. However, the data reads like an outlier and should be taken with a grain of salt unless it holds up in coming months.

The survey was taken before the decision was made to impose fresh tariffs on goods from China and China’s intention to retaliate. Thus it may reflect the increased optimism that the economy was facing few risks to the outlook. Fresh indications that global growth has slowed and chatter about deteriorating geopolitical conditions are also not taken into account for the survey. It may prove that the burst of confidence early in May could see some downward revisions when the final numbers are released at 10:00 ET on Friday, May 31. I would also think that the outlook for confidence in June was also diminished.

The measures of inflation expectations both rose three-tenths in May. The 1-year inflation expectations were up to 2.8%, the highest since November 2018 when it was also 2.8%. The 5-year measure was up to 2.6%, the highest since 2.6% in January.  Persistent increases in energy costs may be part of the story. It is also possible that a sense of slower gains for wages means other goods and services look relatively more expensive in the future.

The FOMC next meets on June 18-19. There has been speculation that Fed policymakers are starting to lean more toward cutting interest rates, especially in the the face of tame inflation and inflation expectations.  However, the more recent numbers suggest that inflation is seeing much of a trend lower, but rather than some transitory factors are moving through the core readings. With the uptick in the Atlanta Fed’s Business Inflation Expectations to 2.0% in May from 1.9% in February through April, and the surprisingly increase in the May Survey of Consumers from the University of Michigan, the FOMC will have less reason to change its current stance of keeping rates on hold for now. The dual mandate is for maximum employment and price stability and both seem in line with that at the present.

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