U.S. Consumer sentiment continues to increase as more activities resume

*The University of Michigan Consumer Sentiment Index increased by 6.6pts to 78.9 in its June- preliminary estimate from 72.3 in May, the largest monthly increase since November 2016, but it remained well below February’s level (101.0). See Chart 1. The survey’s expectations index increased by 7.2pts to 73.1, narrowing the gap with the current conditions index, which increased by 5.5pts to 87.8 (Chart 2).

*Consumer sentiment will shape the recovery in consumption, which accounts for almost 70% of GDP. Households will need confidence in medical systems and treatments, and confidence in the outlook for the economy and labor market. We expect the resumption of more activities and rehiring to lead to moderate gains in sentiment over the summer and expect material health care news to drive larger changes in sentiment.

*The University of Michigan Report notes that consumers’ concerns about a renewed downturn and slow economic recovery have contributed to a record level of income uncertainty. If this uncertainty persists, it would have a material impact on consumers’ willingness to make discretionary purchases.

Households’ assessments of economic and labor market conditions improved in early June. A slightly greater share of households characterized their finances as better than a year ago (June: 40%, May: 38%), and the median 1-2 year ahead expectation for income growth increased sizably to 1.3% from 0.5%, but remained below the pre-COVID-19 expectation of ~2% income growth. A record 50% of households expect lower unemployment over the next year and a near-record 57% of households expect better business conditions.

Consumers rated buying conditions for major household items, vehicles and homes more favorably in early June. 68% of respondents said it is a good time to buy a vehicle (Chart 3), the highest since mid-2018, with 50% referencing price discounts, up from 23% in February. Similarly, favorable views about home prices led 65% of consumers to say it is a good time to buy a home, up from 58% in May, and just a few percentage points below the pre-crisis share of 70%.

Consumers’ expectation for inflation over the next year remained elevated at 3.0%, likely reflecting the jump in food prices (the CPI for food consumed at home jumped by 4.8% yoy in May) (See Chart 4). The 5-year ahead inflation expectation ticked down by 0.1pp to 2.6%, remaining near the top of its recent range.

Chart 1:

Chart 2:

Chart 3: Share of consumers rating vehicle buying conditions favorably

Sources: University of Michigan, Bloomberg and Berenberg Capital Markets

Chart 4:

Roiana Reid, roiana.reid@berenberg-us.com

Member FINRA & SIPC
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