The University of Michigan consumer sentiment index is up 1.4 points to 67.8 in the preliminary report for August after 66.4 in July. The August reading is a little above the consensus of 67.0 in the Econoday survey of forecasters. Overall, consumer sentiment is not much changed over the past four months as consumers' perceptions about US economic conditions, geopolitical events, and the developing presidential election create uncertainty.

The index for current conditions is down 1.8 points in early August to 60.9 after 62.7 in July. The current conditions index has been on a downtrend since March. The August reading is the lowest since 59.4 in December 2022. Consumers are likely a little more concerned about the health of the labor market and prospects for higher earnings. However, the index for future conditions is up 3.3 points to 72.1 in August from 68.8 in July and the highest since 76.0 in April. At least in part, consumers are more hopeful with the prospect of lower interest rates and tamed inflation.

The 1-year inflation expectations measure is 2.9 percent in August, the same as in July and well below the near-term peak of 4.5 percent in November 2023. The 5-year inflation expectations measure is unchanged at 3.0 percent in August where it has been since April. If inflation expectations are coming down in the last few months, they are also well-anchored. Combined with the incremental improvements in upward price pressures, Fed policymakers will have greater confidence that the FOMC can lower short-term rates a bit at the September 17-18 meeting without risking reigniting inflation.

In the first indication for August, consumer sentiment is expected to edge higher to 67.0 from July's 66.4. Readings in this report have been depressed.

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.