Personal Finances Remain Stable as Consumer Sentiment Holds

Consumer sentiment was relatively unchanged in August and ended the month with its second-highest reading in 21 months, according to the University of Michigan Surveys of Consumers.

This follows two months of large jumps in sentiment resulting from the substantial slowdown in inflation and ongoing strength in labor markets. Overall, consumers remain supported by strong income expectations, but they perceive few meaningful improvements in August relative to July, says U-M economist Joanne Hsu, director of the Surveys of Consumers.

“This month’s reading reflects divergent views of consumers, with some emphasizing the stark improvement over last summer’s excessively high inflation and others focusing on the lack of notable changes in economic conditions this month,” she said. “With strong income expectations, consumers may be hopeful that the economy will be on an upswing again, but for the moment they are reserving judgment.”

Personal finances of consumers remain stable
Consumers’ views of their personal finances moved sideways this month, Hsu said. Assessments of their current living standards slipped 3% from July but remain 16% above a year ago. Consumers expect improvements ahead; the year-ahead expected change in personal financial situations inched up 2% from last month and reached their most favorable reading in over two years, supported by strong income expectations, particularly among lower-income consumers.

Their views are buoyed not only by cooling inflation but also continued strength in labor markets, Hsu said. In fact, a majority of consumers expect their incomes to rise at least as much as inflation. Recent trends in gas prices and stock markets had little net impact on consumer sentiment.

Economic outlook softens
Expectations for business conditions slipped 4% for the year ahead and fell 12% for the next five years. While these declines may appear sizable, they are primarily a consequence of the large surges in the economic outlook seen in June and July rather than a meaningful deterioration in consumer views this month, Hsu said.

August readings for both the short-term and long-term economic outlook are the second-highest since April 2022 and July 2021, respectively. The factors that supported the substantial growth in the economic outlook earlier in the summer—the slowdown in inflation and the strength in labor markets—have continued into August.

Consumer Sentiment Index
The Consumer Sentiment Index fell to 69.5 in the August 2023 survey, down from 71.6 in July and above last August’s 58.2. The Current Index fell to 75.7, down from 76.6 in July and above last August’s 58.6. The Expectations Index fell to 65.5, down from 68.3 in July and above last August’s 58.0.