Consumer confidence increased to a six-year high in July, according to the University of Michigan and Thomson Reuters. The Consumer Sentiment Survey had originally been estimated to decline slightly in preliminary figures, but instead, the final report suggests a gain of 1.0 point. The overall index rose from 84.1 in June to 85.1 in July, its highest level since July 2007. In general, we have seen Americans become more confident in the economy, with the index improving from the 72.9 reading of December.
The progress in sentiment has occurred in the views of both the current and expected future economic environment. In the July data, the index for current conditions rose from 93.8 to 98.6, and the average for the past three months has been 96.8. This compares to the average of 88.7 in the first four months of 2013, and indicates a pickup in confidence more recently. Similarly, the public has also become more optimistic about the future, with the average in the forward-looking component rising from 68.9 in the first four months and 76.7 since then.
Surveys such as this one tend to react to pocketbook issues. The improvements so far in 2013 can largely be attributed to rising home and equity values, which have allowed Americans to feel a little wealthier, and at the same time, we have seen modest gains in incomes. Earlier this year, confidence measures were impacted by higher payroll taxes and persistent headwinds in the domestic and global economy. While those have not gone away, they have simply been counteracted by the larger positive forces in the macro environment. Still, Americans are also keenly aware of the challenges, too, including elevated unemployment rates and frustrations with slow growth.
Moving forward, it will be interesting to see how higher interest rates and gasoline prices impact consumer sentiment. History tells us that they tend to be a drag on confidence. In the end, though, the value in these types of surveys is in how they predict consumer behavior, and so far, we have seen modest gains in consumer spending, helping to lift output figures.
Chad Moutray is the chief economist, National Association of Manufacturers.