The University of Michigan reported on Friday that consumer sentiment and inflation expectations improved in the second half of May.
This may be welcome news after the Federal Reserve seemed less sure about whether interest rates were sufficiently restrictive or not. The effect of high interest rates still appeared in the durable goods data that was also released on Friday.
Read more of RSM’s insights on the economy, industrials and the middle market.
Although April showed strong growth in both orders and shipments, the big downward revisions to March’s data were enough to cancel out April’s positive numbers. Still, spending on capital goods, which is part of the calculation for gross domestic product, in April indicated a stronger quarter of GDP growth for the nonresidential investment component.
With mixed results from the investment spending data and inflation expectations declining, the economy should continue to gradually slow down in terms of both growth and inflation, preparing the way for rate cuts in the second half of this year.
In more detail, durable goods orders increased by 0.7% in April, driven by a 15.2% rise in defense spending. Core capital goods orders, which exclude aircraft and defense, increased 0.3% on the month.
The rise was widespread, with all components showing gains. Shipments of core capital goods increased by 0.4%, driven by vehicles and parts, which rose by1.7% and primary metals, up 0.8%.
Consumer sentiment increased to 69.1 from 67.4 previously, as both current conditions and expectations improved.
More important, 12-month inflation expectations dropped to 3.3% from 3.5% earlier, while the 5 to 10-year expectations also dropped to 3.0% from 3.1%.
The declines in gasoline prices and overall inflation were most likely the main causes for the improvement in inflation expectations.
One notable data point within the sentiment survey was consumers’ job market expectations. Job losses and unemployment are expected to increase as the labor market continues to slow down.
