Consumer Sentiment Is Flashing a Warning Sign About the U.S. Economy

Americans are far more optimistic about the current situation than they are about the future.
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Buiter: U.S. Won't Drag World Into Growth Recession

Consumer sentiment dropped in July from the previous month, but slightly more concerning data lurked below the headline of the report.

A gap has widened between consumers' attitudes about the current economy versus their expectations, figures released on Friday showed. The spread between the two measures is now its widest since 2006.

The gap has often been pointed to as an early warning sign for future recessions. While that doesn't necessarily always hold true, the increasing spread is still worrisome, said Richard Curtin, director of the University of Michigan's consumer sentiment survey. 

"It's not signaling that a recession is imminent or even possible in the next year, but it is somewhat troublesome," Curtin said. 

Likely dragging down expectations is the slow pace of growth—a separate report on Friday showed gross domestic product climbed at just a 1.2 percent annualized rate in the second quarter, less than half of what economists expected—and the rising uncertainty caused by the U.S. presidential election, Curtin said.

Traditionally, when consumers see their current situations so much more favorably than the future, the gap has been closed by Americans lowering their assessments of the present, he said. 

Weaker consumer confidence now could also lead to less consumer spending, which could have a bleak impact on growth, given that consumption has been just about the only thing shoring up GDP lately.

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