The University of Michigan consumer sentiment index is revised down to 71.6 in the final July reading after 72.6 in the preliminary report. However, the index is well above the final June reading of 64.4 and the highest since 71.7 in October 2021. The July index is below the consensus of 72.6 in the Econoday survey of forecasters.

The still solid reading may be disappointing compared to market expectations. Nonetheless, it places consumers' perceptions of the economy at the best in nearly two years.

The downward revision in July is due to a lowering of the index for future expectations to 68.3 in the final report from 69.4 in the preliminary, as well as less positive perceptions of current conditions with that component down to 76.6 in the final report after a preliminary 77.5.

The June report points to alleviation in inflation worries and continued confidence in labor market conditions. It does not suggest that concerns about a recession have faded too far. It will take another month or two of similar reports to confirm that consumers are feeling better about the economy in a sustainable way.

The one-year inflation expectations measure is unrevised at 3.4 percent in July, up a tad from 3.3 percent in June, but consistently below the near-term peak of 5.0 in October 2022. An easing of upward pressures in food and energy prices has provided some relief. The 5-year inflation expectations measure is unchanged at 3.0 percent in July from June. Consumer expectations for future aligned with the Fed's medium term remain in a narrow range of 2.9 percent to 3.1 percent for the past two years. This indicates that inflation expectations, if a bit higher than before then, are well anchored.

Consumer sentiment is expected to end July at 72.6, unchanged from July's mid-month flash and more than 8 points higher from June. Year-ahead inflation expectations are expected to hold at the mid-month's 3.4 percent which was 1 tenth higher than June.

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.