The University of Michigan consumer sentiment index is revised higher to 59.2 in the final report for May from a preliminary 57.7. The final reading is above the 58.0 consensus in the Econoday survey. Nonetheless, the index levels continue to display moribund confidence about economic conditions on the part of consumers. The index is the lowest so far in 2023.

The index for current conditions is little revised at 64.9 in the final report after a preliminary 64.5. It is below the 68.2 reading in April, and only slightly above the 63.3 in May 2022. The index for future conditions is revised up to 55.4 in May from the preliminary 53.4. This is a solid revision, but the index remains below 60.5 in April and is the lowest since 55.6 in November 2022. Consumers appear concerned about a downturn in the economy, higher borrowing costs, and lingering upward price pressures for inflation.

The 1-year inflation expectations measure improved to 4.2 percent in the final May report after a spike higher to 4.6 percent in April. In the near term, consumers have seen some easing in prices for household essentials like food and energy, but not so much for housing and non-housing services. While inflation expectations have not come unanchored, the 5-year inflation expectations measure better aligned with the Fed's medium term outlook than the 1-year is up a tenth to 3.1 percent in May and the highest since 3.1 percent in June 2022.

Consumers appear to consider higher prices more entrenched with the May reading at the top of the recent trend range (about 2.9 percent to 3.1 percent since the beginning of 2022). This may help persuade the FOMC that monetary policy restraint will have to be maintained for some time to ensure that expectations do not worsen while the Fed works to tame inflation.

Consumer sentiment is expected to end May at 58.0, nearly 6 points below April but 3 tenths up from May's mid-month 57.7 flash.

The University of Michigan's Consumer Survey Center questions households each month on their assessment of current conditions and expectations of future conditions. Preliminary estimates for a month are released at mid-month and are based on about 420 respondents. Final estimates are released near the end of the month and are based on about 600 respondents.

The pattern in consumer attitudes and spending is often the foremost influence on stock and bond markets. For stocks, strong economic growth translates to healthy corporate profits and higher stock prices. For bonds, the focus is whether economic growth goes overboard and leads to inflation. Ideally, the economy walks that fine line between strong growth and excessive (inflationary) growth.

This balance was achieved through much of the nineties and, in large part because of this, investors in the stock and bond markets enjoyed huge gains. It was during the late nineties that the consumer sentiment index hit its historic peak, reaching levels that were never matched during the subsequent 2001 to 2007 expansion nor during the long expansion following the Great Recession.

Consumer spending accounts for more than two-thirds of the economy, so the markets are always dying to know what consumers are up to and how they might behave in the near future. The more confident consumers are about the economy and their own personal finances, the more likely they are to spend. With this in mind, it's easy to see how this index of consumer attitudes gives insight to the direction of the economy. Just note that changes in consumer confidence and retail sales don't move in tandem month by month.