February 16, 2018 11:30 AM, EST

Consumer Sentiment Jumps After Tax Cuts Blunt Stock Gyrations

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U.S. consumer sentiment unexpectedly rose in February to the second-highest level since 2004 as tax cuts and a strong job market helped Americans shrug off stock-market volatility, a University of Michigan survey showed Feb. 16.

Highlights of February Preliminary Michigan Sentiment

• Sentiment index rose to 99.9 (estimated 95.5), highest since October’s 13-year high, from 95.7 in January.

• Current conditions gauge, which measures Americans’ perceptions of their finances, climbed to 115.1 from 110.5.

• Expectations measure advanced to 90.2 from 86.3.

• Year-ahead inflation expectations unchanged at 2.7%.

Key Takeaways

The rise in sentiment, which surpassed the forecasts of all analysts surveyed by Bloomberg, comes as Americans’ paychecks are getting bigger due to the implementation of tax cuts under legislation signed by President Donald Trump in December.

The increase is also consistent with data on solid hiring and rising wages released by the Labor Department earlier this month.

Some 35% of respondents gave favorable references to government policies, matching January as the highest level in more than a half century, according to the report.

Most of the positive news involved changes to tax policies and employment gains, while just 6% cited negative references to stock prices.

Inflation expectations were unchanged, even after the wage figures sent Treasury yields spiking and started a rout in equities that pushed them into the first correction in two years. Consumers aren’t expecting a sudden surge in inflation, and the fewest consumers in decades cited rising prices as a cause of declining living standards, the report said.

At the same time, rising borrowing costs may limit sentiment in coming months, with the 30-year fixed mortgage rate rising this week to the highest level since 2014. The report said higher interest rates in the year ahead were expected by the biggest share of consumers since 2005.

Official’s Views

“More consumers reported that they had recently heard news about economic developments in early February than at any other time since 1983,” Richard Curtin, director of the University of Michigan consumer survey, said in a statement. “The stock market was rarely mentioned, and remarkably, it was more likely to be mentioned as a favorable development” because it was already rebounding and was up on an annual basis.

Other Details

• Inflation rate over next five to 10 years seen at 2.5%, unchanged from January.

• Homeowners saying it’s a good time to sell rose to highest in a decade; respondents see 2% increase in home values in year ahead, highest since 2007.

• Fewest consumers in decades mentioned favorable impact of low prices and interest rates on buying plans; instead, consumers are basing discretionary purchases on income, job security.

With assistance by Chris Middleton