US Consumer Sentiment Reaches Four-Month High; Import Prices Drop

In September, U.S. consumer sentiment rose to a four-month high due to expectations that inflation will continue to decrease over the next year and household incomes will improve. However, opinions on the labor market weakened amid slower job growth.

 

Supporting the outlook for improving inflation, other data from Friday showed that August import prices fell by the most in eight months, driven by widespread declines in goods costs. Government data earlier this week showed only mild increases in producer and consumer prices.

 

With decreasing price pressures, the Federal Reserve has room to focus on the labor market, which has slowed significantly from last year's strong job growth. The U.S. central bank is expected to start its long-anticipated easing cycle next Wednesday, with a 25-basis-point interest rate cut all but assured.

 

"We believe expectations of lower interest rates and slowing inflation are making people feel more optimistic about the economic outlook," said Carl Weinberg, chief economist at High Frequency Economics.

 

The University of Michigan's preliminary index of consumer sentiment reached 69.0 this month, the highest level since May, up from a final reading of 67.9 in August. Economists surveyed by Reuters had projected a preliminary reading of 68.5.

 

Sentiment improved due to more favorable buying conditions for durable goods, as consumers found prices to be favorable. Consumers' expectations for personal finances and the economy over the next 12 months also brightened, though their views of the labor market softened.

 

The proportion of consumers expecting the unemployment rate to rise over the next year increased to a 16-month high of 39%, up from 37% in August. The rise in sentiment followed party lines.

 

"An increasing number of both Republicans and Democrats now expect a Harris victory," said Joanne Hsu, Director of Surveys of Consumers. "Reflecting their differing views on the economic impact of a Harris presidency, partisan gaps in sentiment slightly widened."

 

The survey was conducted before Tuesday's debate where Republican candidate Donald Trump faced off against Vice President Kamala Harris, the Democratic nominee for the November 5 election.

 

The survey's reading of one-year inflation expectations dropped for the fourth straight month to 2.7%, the lowest since December 2020, down from 2.8% in August. Its five-year inflation outlook slightly increased to 3.1% from 3.0% the previous month.

 

The elevated long-term inflation expectations, stable labor market, and still-strong core inflation figures argue against hopes in the financial markets for a half-percentage-point reduction.

 

Financial markets estimated around a 43% chance of a 50 basis point rate cut at the Fed's policy meeting on September 17-18, up from about 15% following this week's inflation data, according to CME Group's FedWatch Tool. The odds of a 25 basis point rate cut stand at around 57%, down from 87% earlier in the week.

 

Stocks on Wall Street were trading higher after former New York Fed President Bill Dudley said there was "a strong case" for a half-point rate cut. The dollar weakened against a basket of currencies, and U.S. Treasury yields decreased.