American consumer sentiment improved more than expected in July, with the University of Michigan’s widely watched index rising nearly 12 percent from June’s reading to reach 55.2, according to data released July 31.
The final July figure came in above both the preliminary estimate of 54.4, released earlier in the month, and the consensus forecast of 54 among economists. While the rebound was welcome news for those looking for signs of stabilization in household confidence, the index remains more than 10 percent below its level from a year ago, suggesting that the improvement comes from a relatively depressed baseline rather than a return to broadly optimistic conditions.
Two component indexes within the report also improved. The measure of current economic conditions rose 15 percent from June, reflecting how consumers are assessing their immediate financial situation. The expectations index, which captures how Americans feel about conditions in the months ahead, climbed 9 percent. Both moves indicate that the improvement in overall sentiment was broad-based rather than driven by a single element of the survey.
Why sentiment has been under pressure
Consumer sentiment has been a reliable barometer of the financial anxieties that translate into household behavior, and the reading has been suppressed for much of the year by a combination of factors that have made everyday economic life feel more expensive and uncertain. Gasoline prices have climbed sharply in recent weeks, a consequence of the U.S.-Iran military conflict that has disrupted oil flows through the Strait of Hormuz and pushed global crude prices higher. Higher gasoline costs affect consumer budgets directly and tend to generate a negative psychological effect on sentiment that extends beyond their direct financial impact.
The resumption of U.S.-Iran hostilities had led some economists to anticipate downward revisions to the preliminary July estimate rather than an upward one. The stronger final reading suggests that the positive elements of household financial conditions were sufficient to offset those external pressures, at least within the survey period.
The household balance sheet argument
The view that consumer spending and sentiment can remain resilient despite elevated prices rests largely on the condition of household balance sheets, which improved substantially during and after the pandemic as savings accumulated and debt levels were managed. Many American households, particularly those in the middle and upper income ranges, entered this period of elevated prices with more financial cushion than in prior cycles.
A market strategist at Principal Asset Management made this argument in a note accompanying the data release, suggesting that strong household balance sheets provide enough of a foundation to absorb weakness in sentiment and help keep the overall economy resilient to emerging negative pressures. The argument is not that consumers feel good about the economy, because the data clearly shows they do not, but that their financial position allows them to keep spending even when they feel pessimistic.
That distinction between what people say in surveys and what they do in stores and online has been one of the more persistent puzzles of this economic cycle. Sentiment readings have been significantly below historical averages for the better part of two years, yet consumer spending has remained robust enough to support continued economic growth.
What the July rebound reflects
The June reading that July is improving upon was itself depressed, which makes some portion of July’s gain a statistical rebound from an unusually low point. Understanding whether the July improvement represents the beginning of a genuine trend toward higher confidence or a temporary bounce within a longer period of suppressed sentiment requires watching the data over several more months.
The external environment heading into August does not obviously support a sustained rebound. Gasoline prices remain elevated, the U.S.-Iran conflict continues, and the Federal Reserve has maintained interest rates at levels that keep borrowing costs high for consumers carrying credit card balances or shopping for mortgages. Those pressures are unlikely to abate quickly, which is why many economists remain cautious about reading too much into a single month’s improvement in a survey that can be volatile.
For now, the July data offers a modest piece of encouragement in an economic landscape that has been generating more concern than comfort for most of the year.
