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First Cut: Preliminary May Consumer Sentiment Index ekes out a small gain as the shock wears off

The preliminary May University of Michigan Consumer Sentiment Index actually rose 1.9 point to 73.7 after 71.8 in April. Perceptions of current conditions improved to 83.0 after 74.3 in the April, while the outlook for six months from now took a step or two lower and fell 2.4 points to 67.7.

This is only the preliminary reading and there is every chance that it will be revised down when the final report is issued at 10:00 ET on Friday, May 29.

The small gain suggests that consumers have had a moment to get over the initial shocks of rapid job losses and widespread restrictions on activity. They have seen some relief from government interventions like the Paycheck Protection Program and are more hopeful with decisions to reopen some businesses – although these may be premature. At present, things aren’t looking quite as grim as they were last month.

Nonetheless, consumers also think that their prospects in the near future are less rosy. They are more concerned about loss of income and the health of the labor market overall as the economy skidded into recession in a very short space of time.

What is curious in the report is the rise in 1-year inflation expectations. Usually something like current levels of gasoline prices would depress near-term inflation expectations. However, I think it may be that consumers are expressing an anticipation of things being less affordable rather than necessarily that prices will rise. With lower income and/or more competition for jobs going forward, consumers see household budgets as stretching less far. The five-year inflation measure remained in line with recent months even with a small one-tenth rise to 2.6%, the highest since August 2019.

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