Tariffs and Rate Cut Hit Confidence

Originally published at The Boock Report.

The University of Michigan consumer confidence index took a hit in August as it fell to 92.1 from 98.4 and that was below the estimate of 97. It’s also the lowest since January and as seen in the chart below, it’s no higher than it was in late 2014. Most of the decline was in the expectations component which fell 8.2 points while current conditions were down by 3.3 points.

The positive within was the income component where those expecting higher income rose to match the best since March and combined with the drop in those seeing lower income, the net income figure rose to the highest since March too. The offset though was the six point drop in expectations for employment over the next 12 months which fell to the lowest since February. The combined result was one-year expectations for household finances fell 12 points to the least since July 2017.

Likely due to the recent tariff news, business expectations fell 23 points to the least since January. To this the University of Michigan said, “consumers strongly reacted to the proposed increase in tariffs on Chinese goods, spontaneously cited by 33% of all consumers in August, barely below the recent peak of 37 %.” Inflation expectations one year out did tick up one tenth to 2.7%.

As for the Fed rate cut, instead of generating confidence as Jerome Powell hoped it would, “the main takeaway from consumers from the first cut in interest rates in a decade was to increase apprehensions about a possible recession.” Imagine if the Fed now cuts 50 basis points in September or pre meeting for that matter. “Consumers concluded, following the Fed’s lead, that they may need to adopt a precautionary spending outlook in anticipation of a potential recession.”

Spending intentions were mostly softer. Those that said it’s a good time to buy a vehicle fell six points to the lowest since November 2013. Those that said it’s a good time to buy a major household item dropped also by six points to match the weakest since October 2014. The further drop in mortgage rates did nothing to encourage people to buy as there was no change in intentions to buy a home and instead there was a nine point jump in those that said it’s a good to sell a house to the most 1992 when this question was first asked. Again, refi’s have been the main beneficiary of the cut in rates.

Bottom line, while confidence numbers are only coincident, it’s apparent that this initial print reflected worries about more tariffs and the messaging the Fed is sending with their rate cut (of course opposite of their intentions to stimulate economic activity). The Japanese and Europeans certainly have experience with that. Wage growth is helping to lift spirits but now there is concern with the labor market.

University of Michigan Consumer Confidence
One Year Household Finance Expectations
Plans to Buy a Vehicle
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