Americans are pleased with the economy at mid-summer and expect the good times to continue and perhaps improve.

The University of Michigan preliminary sentiment index for July edged up to 98.4 from 98.2 in June. The forecast had been for a reading of 98.5. The index of current conditions dropped to 111.1 from 111.9 and the expectations gauge rose to 90.1 from 89.3.

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“Consumer sentiment remained largely unchanged in early July from June, remaining at quite favorable levels since the start of 2017,” said the survey chief economist Richard Curtin in the accompanying statement.

Sentiment reading have been strong for more 30 months after rising to 98.2 in December 2016 from 93.8 that November. Monthly variation has been muted with a range 10.2 points from 91.2 in January 2019 to 101.4 in March 2018. The January low was a brief reaction to the partial government shutdown in late December and January which had little or no economic impact. The economy expanded at a 3.1% annual rate in the first quarter. Excluding the January low the sentiment range has been just 8 points, 93.4 to 101.4.

By comparison in the two years to June 2016 the variation was almost twice as great at 15.6, from 82.5 in August 2014 to 98.1 in January 21015.

Retail sales illustrate the high levels of consumer satisfaction. Consumption has been on a modest upswing this year.  Overall purchases rose 0.4% in June, better than the 0.1% consensus prediction.  Sales have been positive for four straight months and for five out of the last six.  Spending in the so-called control group, the government’s consumption component of GDP climbed 0.7% in June more than double the 0.3% forecast.  They also been ahead for four months in a row and five of the last six. 

This report is the first of two consumer sentiment measures to come out before the Federal Reserve FOMC policy meeting in two weeks. The second is from the Conference Board which will release its gauge of consumer confidence on July 30th. Over the past two years this measure has registered the strongest levels of consumer optimism almost two decades.

The Fed is widely expected to cut rate by at least 25 basis points even though the economy shows no signs of a recession.  The current fed funds futures show a 56.9% chance of a 0.25% cut and a 43.1% chance for a 0.50% reduction.

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Chairman Jerome Powell said at his Congressional testimony earlier this month that a cut might be “appropriate” to help sustain the economic recovery. He noted that the booming labor economy was delivering wages gains and employment to workers whom had been left out of prior expansions.   The bank has also cited the trade dispute with China, Brexit and the slowdown in global economic growth as additional reasons that a rate cut might be needed.

Inflation is also running below the Fed’s 2% target. The core PCE rate was 1.6% year to year in May and has fallen from 2.0% in December.

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Consumer expectations of inflation and unemployment as depicted in the Michigan Surveys seem to run counter to the standard Phillips Curve model with higher percentage of consumers anticipating both rising unemployment and higher interest rates which the survey associates with increasing inflation.

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