U.S. consumer sentiment increased by less than initially reported in May as an escalation of the trade war with China weighed on the outlook for the overall economy, paring gains that previously showed a 15-year high.

The University of Michigan’s sentiment index rose to 100 from the prior month’s 97.2, data showed Friday. That’s still an eight-month high but below the 102.4 preliminary reading and the median analyst estimate for a final figure of 101.5. The gauge of current conditions decreased to 110 while the expectations index climbed to 93.5. Five years ago in May 2014 under President Barack Obama, the index was at 81.9.

Key Insights

• Although consumer sentiment saw a boost from unexpectedly strong economic growth and the lowest unemployment in 49 years, intensifying tensions between the world’s two largest economies weighed on confidence. The decline in confidence at month’s end “was concentrated in prospects for the overall economy,” the report said.
• Unfavorable references to tariffs more than doubled in late May from the first half of the month, with 35% of consumers spontaneously mentioning the levies. That matched a peak recorded in July 2018 when the U.S. began its initial round of duties on Chinese goods.
• President Donald Trump’s threat Thursday to impose tariffs on all imports from Mexico may further weigh on confidence in coming months. Trump this month increased duties on some goods from China to 25% from 10%, and the nation plans to increase tariffs on U.S. goods on June 1 in response.
• The data follow other measures of consumer sentiment out this week. The Conference Board’s confidence measure climbed to a six-month high in May, and Bloomberg’s weekly comfort gauge increased for a third week.
• Consumers expect faster price gains with inflation expectations for the year ahead rising to 2.9%, and increasing to 2.6% over the next five to 10 years. This may provide some comfort for Federal Reserve policy makers who believe inflation expectations are a leading driver of actual inflation. Price gains have persistently come in below the Fed’s 2% target since it was adopted in 2012.
• Rising tariffs helped push a measure of buying conditions for household durable goods to the lowest level in nearly four years, according to the report. Vehicle and home- buying attitudes were largely unchanged in May.
• The share of consumers who expected an economic downturn in the next five years fell to the lowest level since 2004.
• Interviews were conducted April 24 to May 28, with the preliminary survey ending May 15.

Official’s View

“Although consumer sentiment remained at very favorable levels, confidence significantly eroded in the last two weeks of May,” Richard Curtin, director of the University of Michigan consumer survey, said in a statement.