The preliminary University of Michigan consumer sentiment index dips 0.4 point to 71.2 in August from the final 71.6 in July as improved perceptions of current conditions are more than offset by a downturn in expectations for six months from now. The early August reading is a close match to the consensus of 71.3 in the Econoday survey of forecasters. Survey Director Joanne Hsu said in the report that the reading in August is"essentially unchanged" from July, and"is now about 42 percent above the all-time low reached in June of 2022 and is approaching the historical average reading of 86."

Hsu said,"consumers perceived few material differences in the economic environment from last month, but they saw substantial improvements relative to just three months ago." The current conditions index is up 0.8 point to 77.4 in August after a final 76.6 in July, and up 18.8 points from 58.6 in August 2022. The expectations index which accounts for roughly 60 percent of the overall index is down 1.0 point to 67.3 in August, but up 9.3 points from August 2022.

The upshot is that although the August index is down a bit from the prior month, consumer sentiment has not meaningfully lost ground despite another hike in rates by the FOMC in late July, higher gasoline prices, and cooling hiring. In part this is connected to the improvement in the inflation outlook.

The one-year inflation expectations measure is down a tenth to 3.3 percent in early August from July and has been little changed for the past three months. The five-year inflation expectations measure better aligned with the Fed's medium-term outlook for inflation is also down a tenth to 2.9 percent in August from July. With few exceptions, the five-year measure has hovered close to 3 percent for the past two years which indicates that inflation expectations remain well anchored.

Consumer sentiment in August, which in July jumped more than 7 points to 71.6, is expected to edge back a modest 3 tenths to 71.3.

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.