Consumer sentiment surges due to lower gas prices

Washington (CNN) — Lower gas prices helped Americans feel more optimistic about the economy early this month, though that relief might be short lived if the conflict in the Middle East continues to intensify.

The University of Michigan’s latest survey of Americans, released Friday, showed that consumer sentiment surged 10% early this month to a preliminary reading of 54.4, the highest point since February.

“Consumer sentiment climbed to its highest reading since February of this year on the basis of easing price pressures at the pump in recent weeks,” Joanne Hsu, the survey’s director, said in a release. “This month’s rise in sentiment was pervasive across the population, seen across groups by age, income, wealth, and political party.”

“However, with prices remaining frustratingly high, consumers are hardly ebullient about the economy; sentiment is down 12% from a year ago,” she added.

Sentiment has already mostly recovered from the record low reached in May, as the war with Iran sent energy prices skyrocketing, though it remains below pre-war levels. Consumer sentiment is closely tied with gas prices, so any recovery hinges on whether energy markets stabilize, which largely hinges on a permanent solution to the conflict in the Middle East. On Friday, attacks between the United States and Iran widened as the war showed no signs of de-escalating.

However, even if sentiment reverses course, it may not mean much for economic activity, since sentiment hasn’t been a good predictor of future spending patterns in recent years. Retail spending in June grew just 0.2%, according to Commerce Department data released Thursday, though when excluding higher gas prices (since the figures are not adjusted for inflation), spending was up by a solid 0.7% that month.

Spending largely hinges on the state of the labor market, which remains in decent shape with unemployment at a low 4.2% and new applications for unemployment assistance still at historically low levels. So long as Americans aren’t out of work, they will continue to have the means to spend, even if they’re feeling lousy.

Americans have unmistakably soured on the economy, according to various surveys, as the economic shocks of recent years have driven up the cost of living. Americans’ expectations for inflation in the year ahead, according to the Michigan survey, declined to 4.2% this month from 4.6% in June, but it “substantially exceeds the 3.4% seen in February before the Iran conflict began, along with all 2024 readings,” the release said.

Some critics of the Michigan survey, however, dispute that consumers are actually feeling worse about the economy than during the Covid-19 pandemic, the Great Recession, the 9/11 terrorist attacks, and several other wars since the survey’s first reading in 1952. On its face, the economy looks to be in good shape with low unemployment, steady spending and a buoyant stock market.

But Hsu stands by the survey’s soundness and its methodology, which in recent years shifted to gathering survey responses online rather than over the phone.

“It shouldn’t be too surprising that people felt differently about the world, including the economy, after the pandemic,” Hsu told the Wall Street Journal.

The-CNN-Wire
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