The University of Michigan consumer sentiment index is down 1.8 points to 67.7 in the preliminary September report after a final 69.5 in August. The September reading is below the consensus of 69.2 in the Econoday survey of forecasters. The index decline is due to a weakening of current sentiment, while the outlook for the near future improved somewhat.

The index for current conditions is down 5.9 points to 69.8 in September after 75.7 in August. Consumers probably responded to signs of softening in the labor market and an uptick in household costs due to higher gasoline prices.

The expectations index for about six months from now is up 0.8 point to 66.3 in September after 65.5 in August. While consumers may not be very confident in future conditions, it looks like recession fears have ebbed and the outlook for inflation has improved.

The 1-year inflation expectations measure is down 4 tenths to 3.1 percent in September, the lowest since 3.1 percent in March 2021 just before the current inflation episode started to be felt in consumer prices. The 5-year inflation expectations measure is down 3 tenths to 2.7 percent in September, its lowest since 2.7 percent in September 2022 at a time when the pinch of higher interest rates was becoming more acute for consumers. The 5-year measure is more in line with the Fed's medium-term inflation outlook than the 1-year measure. It hints that inflation is expected to be closer to the Fed's 2 percent inflation target over time and that current inflation is not going to become entrenched.

The first indication of consumer sentiment in September is expected to edge down to 69.2 from August's 69.5 which was down more than 2 points from July.

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.