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First Cut: Preliminary August Consumer Sentiment Index sensitive to recession fears

The preliminary University of Michigan Consumer Sentiment fell 6.3 points in August to 92.1 from 98.4 in July. Consumers were rattled by increased worries about a recession as the stock market plunged and bond yields flashed warning signs as investors opted for less risky investments. Consumers were also shaken by tragic events in the US related to mass shootings in El Paso, TX and Dayton, OH. Some of this is likely to wear off and the index could well be revised higher when the final reading is released on Friday, August 30.

Consumers lost less confidence in current conditions (down 3.3 points to 107.4) than they did in the six month outlook (down 8.2 points to 82.3). In both cases, readings harked back to January and February of this year when the partial federal government shutdown and signs of fundamentally slower growth caused them to question their prospects in the labor market and for improvement in household incomes.

The declines should not obscure that on the whole consumers remain quite confident about conditions in the US. Recent events and the negative tone of the current news cycle are probably contributing to gloomier perceptions. However, it probably won’t affect consumer spending in the near term unless the situation persists and does have a visible impact on the economy.

Inflation expectations were not much changed in early August from July. Both measures were up a tenth. The 1-year inflation expectations index was 2.7%, in line with the trend of the past 12 months. The 5-year measure — which is more closely associated with the Fed’s “medium term” for inflation — was 2.6%, off the lows of earlier this year and more consistent with expectations that inflation will return toward the Fed’s 2% objective.

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