U.S. consumer sentiment rose to 61.8 in early July, the highest in five months

U.S. consumer sentiment climbed in early July to its strongest level in five months, as worries about inflation started to pull back, according to data from the University of Michigan released Friday.

The preliminary sentiment index hit 61.8, up from 60.7 in June. While that’s a small bump, it’s the highest reading since February. Still, it hasn’t caught up to last year’s levels, signaling that people aren’t fully confident just yet.

The index’s improvement was mostly fueled by a drop in how fast Americans think prices will rise. Short-term inflation expectations eased to 4.4%, down from 5% last month. 

That’s the lowest since February. For the longer haul, looking at the next five to ten years, people see prices going up at an average of 3.6%, the lowest long-term outlook in five months.

Tariffs and weak job expectations still drag optimism

Despite the better reading, concerns remain. Joanne Hsu, who leads the survey team at the University of Michigan, said, “Consumers’ expectations over business conditions, labor markets, and even their own incomes continue to be weaker than a year ago.”

But she added that the recent increase in sentiment signals that people no longer feel like the worst-case scenarios from earlier in the year are coming true. “The recent two-month lift in sentiment suggests that consumers believe that the risk of the worst-case scenarios they expected in April and May has eased,” Joanne said.

That slight increase in hope seems to have a connection with the rally in the stock market, which likely made people feel a bit more financially stable. The current conditions index climbed to 66.8 from 64.8, and the expectations index went up to 58.6. Those aren’t massive jumps, but they do show people are feeling a little better about both their present and future.

The results also showed some political patterns. The boost in sentiment came mostly from Republicans and political independents, while Democrats remained largely unmoved.

The final responses were collected by July 14, more than a week after President Donald Trump signed off on a budget law that extended tax cuts and introduced new breaks for tipped workers. That law might’ve played a role in the rise, though Joanne warned that any future announcements about tariff hikes or rising inflation could push sentiment right back down.

Spending rises as consumers stay active

While feelings about the economy are inching up, spending activity tells a louder story. June retail sales increased by 0.6%, outpacing the 0.2% gain most economists expected, according to the Census Bureau. That surprise helped make up for earlier slowdowns, especially in auto sales, which had been dragging numbers in the previous months.

The stronger-than-expected retail figures sparked a rally in stocks on Thursday. Wall Street responded fast, seeing the sales data as a sign that the consumer isn’t folding under pressure just yet.

More clues are also showing up in alternative spending data. Shruti Mishra, U.S. economist at Bank of America, pointed out that online spending during Amazon Prime Day and recent travel activity looked solid.

“Airport traffic has lagged 2024 levels for most of May and June. It was down 1.5% year over year in the last four weeks of June … but it has rebounded in July. In the first two weeks of the month, airport traffic is up 0.9% year over year. That’s encouraging,” Shruti wrote in a note to clients Thursday.

But there’s still a big cloud hanging over the second half of the summer. Economists are watching tariffs closely. Some import duties are scheduled to take effect on August 1, and if they go through, it could completely reshape the retail environment. That could trigger a new round of recession warnings from Wall Street analysts who’ve already seen the consumer sector stretch thin.

The Jefferies equities research team weighed in with a cautionary note, saying the sector might be headed into an “air pocket” as tariff-related inflation filters down to everyday prices. “More of our consumer respondents reported higher prices in six of the nine categories we track,” the Jefferies note said.

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