May 17, 2019 / 2:34 PM / a year ago

U.S. consumer sentiment robust before escalation of trade war

WASHINGTON (Reuters) - U.S. consumer sentiment jumped to a 15-year high in early May amid growing confidence over the economy’s outlook, but much of the surge was recorded before an escalation in the trade war between the United States and China, which could hurt activity.

Holiday shoppers look at store windows at Henri Bendel store on 5th Avenue in New York November 23, 2012. REUTERS/Brendan McDermid/File Photo

The University of Michigan said its consumer sentiment index increased 5.3% to 102.4, the highest reading since 2004. Economists polled by Reuters had forecast a reading of 97.5.

President Donald Trump last week raised tariffs on $200 billion worth of Chinese goods to 25% from 10%. China retaliated on Monday with higher tariffs on a revised list of $60 billion worth of U.S. products.

Economists have warned the bruising trade fight could weigh on consumer and business confidence, and undercut spending.

The University of Michigan said “negative references to tariffs rose in the past week and are likely to rise further in late May and June.”

“So the recent improvement in sentiment may turn out to be short-lived,” said Daniel Silver, an economist at JPMorgan in New York. “While the ultimate response to tariffs is still unclear, the survey results suggest that consumer sentiment was upbeat before the developments on trade policy from the past couple of weeks.”

Still, some economists viewed the surge in sentiment, which also came despite higher gasoline prices, as a hopeful sign for a pickup in consumer spending after it slowed sharply in the first quarter. Consumer confidence accounts for more than two-thirds of U.S. economic activity.

The University of Michigan consumer sentiment survey’s expectations index also rose to its highest since 2004.

The survey showed consumers expecting higher inflation over the next 12 months and five years. The survey’s five-year inflation expectations measure rose to 2.6% early this month from 2.3% in April. Federal Reserve officials are keeping a close eye on survey-based measures of inflation expectations.

Inflation measures have retreated, contributing to the U.S. central bank’s recent decision to suspend its three-year monetary policy tightening campaign.

A key inflation measure tracked by the Fed has slowed below its 2 percent target, prompting calls from Trump for the central bank to cut interest rates.

“This is the kind of rebound the Fed would welcome and it adds to the case that the Fed will not make an insurance cut in interest rates,” said John Ryding, chief economist at RDQ Economics in New York.

Reporting by Lucia Mutikani; Editing by Phil Berlowitz and James Dalgleish

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