U.S. consumer sentiment jumped to the strongest level since 2004 on a surge in economic expectations amid unexpectedly strong growth, highlighting what’s at risk amid a growing trade war with China.
The University of Michigan’s preliminary sentiment index rose to 102.4 in May, topping all estimates in a Bloomberg survey of economists who had projected the gauge would hold at 97.2. All of the gain was in the expectations index, which also climbed to a 15-year high, and the gauge of current conditions ticked up, the report on May 17 showed.
The more upbeat sentiment comes amid first-quarter economic growth that topped expectations at 3.2% and the lowest unemployment rate in 49 years. Still, a recent flare-up in trade tensions between China and the U.S. may weigh on future readings as price pressures hit consumers and weigh on the economic outlook.
Negative references to tariffs rose in the past week and are likely to rise further this month and into June, survey findings show. They peaked in July last year, with about one-third of respondents spontaneously mentioning the tariffs. Underscoring the potential impact of levies: those who had negative views of the levies saw inflation 0.6 percentage point higher and lower economic growth expectations.
Consumers anticipate faster price gains, which may be welcomed by Federal Reserve policymakers who have been concerned that inflation is persistently below their target. Expectations for the year ahead rose to 2.8%, while the inflation rate seen over the next five to 10 years increased to 2.6%.
A report this week showed the Bloomberg Consumer Comfort Index edged up, while the Conference Board confidence measure is forecast to ease slightly this month.
“Consumers viewed prospects for the overall economy much more favorably,” Richard Curtin, director of the University of Michigan consumer survey, said in a statement. “Nonetheless, the data indicate the corrosive impact of an escalating trade war.”
He added that “apart from the direct impact of tariffs on prices, rising tariffs could cause a more general loss of confidence which could further diminish the pace of consumer spending.”
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