The preliminary University of Michigan consumer sentiment index for September edged higher to 69.0 from the final reading of 67.9 in August and 67.9 in September 2023. The latest reading is 1 point above Econoday's consensus and is the highest since 69.1 in May. Consumers, nevertheless, remain cautious. Though inflation appears to be cooling and the labor market is not worsening, there is still a contentious presidential election to get through. Nonetheless, prospects of lower interest rates are likely lifting the economic outlook for consumers.

The index for current economic conditions is up 1.6 points so far this month to 62.9, more than erasing the decline to 61.3 in August. The index of consumer expectations is up 0.9 points to 73.0, the highest since 76.0 in April.

The one-year inflation expectations measure is down a tenth to 2.7 percent and is the lowest since 2.5 percent in December 2020. This suggests that underlying inflation is getting back to normal in the short term. However, the five-year measure is up a tenth to 3.1 percent and is the highest since May 2023. This measure is more in line with the Fed's concept of the medium-term price horizon. There's a hint here that while commodities prices have moderated, upward pressures for services are not abating and will continue to be a source of future inflation.

In the first indication for September, consumer sentiment is expected to hold steady at 68.0 versus August's 67.9. Consumer sentiment has been flat and historically 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.