University of Michigan Consumer Sentiment Index

The University of Michigan consumer sentiment index dropped to 59.5 in early May, its lowest level since 1980, from 62.6 in April. The decline was below market expectations calling for a dip to 62.0.

Surging food and fuel prices depressed confidence in early May. The current conditions component declined to 71.7 in May from 77.0 in April. The expectations index dropped to 51.7 in May from 53.3 in April. The one-year inflation forecast increased again to 5.2% from 4.8% and was at its highest level since 1982. The 5-year inflation forecast also increased, rising to 3.3% from 3.2% and was at its highest level since 1996. This should prove worrisome for the Fed, as one of their major concerns is inflation expectations becoming unhinged.

The drop in confidence contrasts with the earlier released RBC CASH (Consumer Attitudes and Spending by Household) index, which increased 9.5 points in May.

Though confidence has collapsed and faltered further in early May, consumer spending has continued to increase. The latest retail sales data for April contained an upside surprise in the ex-autos component. Real personal disposable income, the most important driver of spending, has held up, allowing for sustained spending gains. Real spending is poised to receive a lift from the rebate cheques and we’ are anticipating an impact in May. To help get some gauge of the presumed impact of the fiscal stimulus, the May chain-store sales data will be monitored closely.

RBC Financial Group
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The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.