Consumer Sentiment: We Need Income Growth

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While certain aspects of the economy are showing signs of improvement, consumer sentiment declined this month as income growth remains depressed. According to Thomson Reuters/University of Michigan’s preliminary reading, consumer sentiment fell to 81.8 in May, compared to 84.1 in April.

The results were worse than expected. On average, economists expected the index to climb higher to 84.5. The consumer gauge has only posted one monthly gain this year, which occurred in April when the index reached its highest level in nine months. In 2013, consumer sentiment ranged from a low of 73.2 in October to a high of 85.1 in July.

Despite an improvement in the unemployment rate this year, stagnant wages are taking a toll on consumers. “The main concern behind the small May loss involved dispiriting trends in wages,” survey director Richard Curtin said in a statement. However, he added, “Consumers judged the current state of the economy at the most favorable levels in ten years.”

During the last recession, the index averaged slightly above 64. In the five years before the financial crisis, it averaged almost 90. Consumer sentiment is one of the most popular measures of how Americans rate financial conditions and attitudes about the economy. The University of Michigan’s Consumer Survey Center questions 500 households each month for the index.

Current economic conditions, which measures whether Americans think it is a good time to make large investments, was worst than expected at 95.1, down from 98.7 in the prior month. Consumer expectations also declined to 73.2 this month from 74.7 in April. The survey’s one-year inflation expectation remained unchanged from the prior month at 3.2 percent, and the survey’s five-to-10-year inflation outlook fell to 2.8 percent from 2.9 percent. However, this could easily change in the coming weeks as recent inflation gauges have picked up momentum.

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