According to preliminary figures, consumer confidence remains high in the US.
According to preliminary figures published by the University of Michigan on Friday and Statista, consumer confidence in the United States cooled down slightly in April as the positive impact of recent tax cuts faded away.
While consumers remain very positive about current economic conditions, they look ahead slightly more worried than a month ago, resulting in a 3.4% drop in the Index of Consumer Expectations, the forward-looking element of the Index of Consumer Sentiment.
Despite the small setback, confidence remains high overall, as the following chart, dating back to January 2000, shows. After a brief worsening of consumer sentiment due to the shutdown in January, confidence was promptly restored thanks to rising incomes, low inflation, plentiful jobs and low unemployment.
Overall, the level of the Sentiment Index during the past 30 months was higher than any other time since 1997 to 2000, the final phase of the record 10-year expansion; a record that will be soon overtaken by the current expansion.
What has been of increasing importance to consumers are rising nominal incomes, and low inflation, producing strong gains in inflation adjusted incomes. Unfortunately, vehicle and home buying have not benefitted from low prices, but consumers have increasingly voiced complaints about rising vehicle and home prices, and slight declines in unit sales of both markets are anticipated in 2019.
The importance of optimism
The importance of consumer optimism and confidence is widely recognized, as high confidence typically boosts private consumption, a key driver of economic growth.
As the University of Michigan explains:
“Economic optimism promotes consumer confidence and a willingness to make large expenditures and debt commitments, while economic uncertainty breeds pessimism and a desire to curtail expenditures and rebuild financial reserves. When many people change from an optimistic to a pessimistic view of economic prospects at the same time, it has been repeatedly found that a widespread shift toward postponement of expenditures follows. It is in this manner that the economic optimism and confidence of individual families exert their influence on the course of the aggregate economy.”