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US Consumers Still Confident, But For How Long?

So far, U.S. consumers are still confident and seem willing to continue opening their purse strings, according to the most recent Conference Board’s Consumer Confidence Index for May.

The latest gain in May has the Index back to the level seen last fall when it was near an 18-year high. However, there’s one caveat: the cutoff date for the preliminary results disclosed on Tuesday was May 16, a week after U.S. President Donald Trump made good on his promise to raise tariffs to 25 percent on $200 billion worth of Chinese imports. A few days before May 16, China retaliated by hiking tariffs on $60 billion worth of American goods brought into the country, and the Trump Administration’s filed a plan to place a 25 percent duty on another $325 billion of Chinese imports that aren’t currently taxed. These goods include apparel, footwear and some textiles.

While consumers had a few days to take into account the tough talk in the trade war battle between the U.S. and China, there certainly wasn’t any time to feel the impact of what a hike on import duties would mean for their wallets.

The tariff hike impacts merchandise leaving Chinese ports beginning as of May 10, the day the tariff increase took effect. Some retailers have reported in first-quarter earnings calls that they have strategic initiatives in place to help them leverage their supply chain savings, and allow them to hold off passing along the increase to consumers. But that holding pattern can’t last forever, and a few companies have already noted that, eventually, consumers will likely see a price increase.

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A public hearing is slated for June 17 in Washington, D.C. on the proposed tariffs on the additional $300 billion in imports from China. The expectation is that those tariffs, once they go into effect, likely won’t affect goods coming into the U.S. until around Labor Day. Back-to-school apparel and supplies could see the hit first, followed by early to late fall goods leading into the holiday season.

Even then, it might be difficult to predict consumer spending in the months ahead.

The May report from The Conference Board rose despite a weak retail sales report in April. And respondents believe the labor market is still good, which means they might be able to shrug off some price increases. What isn’t clear is how many consumers are fully aware of why the Trump Administration has taken a hard line with China to protect American interests in technology and the transfer of intellectual property assets. Should many fully understand the issues and, more importantly, agree with President Trump, they’d likely be willing to pay more for what they choose to buy.

In the latest report from the Conference Board, the Consumer Confidence Index rose to 134.1, up from 129.2 in April. Both components of the Index also saw gains. The Present Situation Index rose to 175.2 from 169.0, while the Expectations Index, which measures short-term outlook, increased to 106.6 from 102.7.

“The increase in the Present Situation Index was driven primarily by employment gains,” Lynn Franco, senior director of economic indicators at The Conference Board, said. “Expectations regarding the short-term outlook for business conditions and employment improved, but consumers’ sentiment regarding their income prospects was mixed.”

Franco said consumers expect the economy to continue growing at a solid pace in the short-term, despite the weak retail sales report last month. Given the short-term outlook, she said the current “high levels of confidence suggest no significant pullback in consumer spending in the months ahead.”

In a nutshell, respondents who said business conditions are “good” rose to 38.3 percent from 37.6 percent, while those who said jobs are now plentiful increased to 47.2 percent from 46.5 percent. Looking out about six months, respondents who expect business conditions to improve rose to 21.9 percent from 19.4 percent, while those who expect more jobs rose 19.2 percent from 16.7 percent. What did shift was the expectations of consumers regarding their own income prospects over the short term. Those who said they expected an improvement rose to 22.6 percent from 21.5 percent, yet those who expect a decrease also rose, increasing to 8.2 percent from 6.8 percent.

Tim Quinlan, senior economist at Wells Fargo Securities, noted that the “white-hot labor market continues to underpin measures of confidence.”

As for the impact from the trade war with China, the economist said: “The most immediate potential hit to spending from the trade war is apt to occur amid a diminished wealth effect should the stock market experience a steep and sustained selloff. With most equity indexes down less than 4 percent, we are not there yet.”