US consumer sentiment drops to seven-month low on trade fears

[WASHINGTON] US consumer sentiment plummeted to a seven- month low in August on growing concerns about the economy even as the labour market shows few signs of weakening from robust levels.

The University of Michigan's preliminary sentiment index slumped to 92.1 from July's 98.4, missing all forecasts in Bloomberg's survey of economists. The gauge of current conditions decreased to 107.4 while the expectations index dropped to 82.3, bringing both readings to the lowest levels since early this year.

The second-lowest confidence reading of Donald Trump's presidency shows consumers may be poised to offer less of a boost to the record economic expansion amid volatility in financial markets and headwinds from abroad. Personal consumption, the biggest part of the economy, was the largest driver of the expansion in the second quarter.

The biggest drop in confidence since January underscores how growing odds of a recession before the 2020 election threaten to dim Mr Trump's chances of winning a second term. Measures of consumer sentiment by political party showed that confidence for Republicans fell to the lowest of Trump's term. Readings for independents dropped while those for Democrats improved.

Consumers "strongly reacted" to the proposed increases in tariffs on Chinese goods, a subject that was spontaneously cited by 33% of those surveyed, near the recent peak of 37 per cent, according to the report. Americans also concluded, following the Federal Reserve's first interest-rate cut in a decade, that they may need to be more cautious about spending in anticipation of a potential recession, the report said.

The July 31-Aug 14 survey period corresponded with an especially volatile period: The Fed rate cut, Mr Trump raised tariffs on consumer goods from China then delayed some, and signs of global malaise multiplied.

Markets convulsed in those two weeks. US stocks posted their two steepest drops of the year while yields on 30- year Treasury bonds fell to record low and 10-year yields dipped below the two-year in a harbinger of recession in the next 18 months.

"The main takeaway for consumers from the first cut in interest rates in a decade was to increase apprehensions about a possible recession," Richard Curtin, director of the University of Michigan consumer survey, said in a statement. "Consumers concluded, following the Fed's lead, that they may need to adopt a precautionary spending outlook in anticipation of a potential recession."

BLOOMBERG