US consumer sentiment rises for first time this year as 'shock' of high tariffs wears off

The University of Michigan's consumer sentiment index rose to 60.5 in June, exceeding expectations and marking the first increase since December 2024, driven by easing concerns over tariffs and inflation. One-year inflation expectations decreased to 5.1% from May's 6.6%, while long-run expectations also slightly declined to 4.1%; however, the survey indicates that consumers remain cautious about the overall economic trajectory despite the improvement, as views on business conditions and personal finances remain below December levels.

Analysis

US consumer sentiment showed a notable improvement in June, with the University of Michigan's index rising to 60.5 from 52.2 in May, surpassing economist expectations of 53.6 and marking its first increase since December 2024. This uptick is attributed to a perceived dialing back of aggressive tariff stances by President Trump and a growing acceptance of tariffs as an ongoing economic reality. Specifically, the US effective tariff rate, which peaked around 27% in April, is now estimated by JPMorgan to be closer to 14% following pauses on certain duties. Inflation expectations have also moderated, with one-year expectations dropping to 5.1% from a four-decade high of 6.6% in May, and long-run expectations easing slightly to 4.1% from 4.2%. This improvement in sentiment aligns with the May Consumer Confidence reading from The Conference Board, which rose to 98, well above April's 85.7. However, Survey of Consumers director Joanne Hsu cautioned that consumer views on business conditions, personal finances, labor markets, and buying conditions remain below December levels, indicating that consumers are still "guarded and concerned about the trajectory of the economy." Goldman Sachs chief US equity strategist David Kostin noted that soft economic data, such as consumer surveys, typically bottom out before hard economic data like inflation or jobs reports, suggesting this could be an early, albeit tentative, positive signal.

Key Decisions for Investors

• Consider the recent rebound in consumer sentiment as a potential leading indicator for economic stabilization, but remain cautious as consumer views on key financial aspects are still subdued and this represents 'soft' data.
• Closely monitor upcoming 'hard' economic data releases, particularly inflation and employment figures, to corroborate the positive signals from consumer surveys and assess the true underlying economic momentum.
• Factor in the ongoing tariff situation and its impact on inflation and corporate costs, noting that while the effective tariff rate has decreased from its peak, it remains substantially elevated compared to historical norms, potentially influencing sector-specific performance and overall market volatility.