UMich consumer confidence rose in the preliminary March print, beating expectations at 97.6 with current conditions surging but expectations stalling somewhat.
This exuberance is occurring as real earnings growth slumps. But crucially, the partisan divide is unprecedented.
The overall level of consumer sentiment remained quite favorable in early March due to renewed strength in current economic conditions as well as the extraordinary influence of partisanship on economic prospects.
The Current Economic Conditions component reached its highest level since 2000, largely due to improved personal finances. While current economic conditions were not affected by partisanship, this was not true for the component about future economic prospects: among Democrats, the Expectations Index at 55.3 signaled that a deep recession was imminent, while among Republicans the Index at 122.4 indicated a new era of robust economic growth was ahead.
Interestingly, those who self-identified as Independents had an Expectations Index of 88.3, which was nearly equal to the midpoint of the partisan difference.
Importantly, there was no moderation in these extreme views from last month, with the maintenance of the partisan divide fueled by selective attention to economic news, with Democrats more frequently reporting unfavorable developments and Republicans more frequently hearing of favorable changes.
Expectations regarding future economic conditions remained highly partisan. Continuous good times in the economy over the next five years were expected by 87% of Republicans, but only 22% of Democrats. In contrast, renewed economy-wide downturns were anticipated by 71% of Democrats, but only 11% of Republicans. This would imply that Republicans anticipate the longest economic expansion in more than a century. Perhaps even more extreme were expectations regarding unemployment: 75% of Republicans anticipated declining unemployment, compared with just 12% of Democrats. Indeed, based on the traditional correspondence between unemployment expectations and subsequent changes in the unemployment rate, the Republican data would be consistent with a zero unemployment rate in 2018! While the Republican data certainly represent unattainable outcomes, the data for Democrats, while within traditional ranges, also represent extreme predictions.
Overall, the sentiment data has been characterized by rising optimism as well as by rising uncertainty due to the partisan divide. Optimism promotes discretionary spending, and uncertainty makes consumers more cautious spenders. This combination will result in uneven spending gains over time and across products.