Consumers love the job market but aren’t crazy about rate hikes

U.S. households appeared to be confused in August. Was it the heat? A sizable divergence in two of the most widely followed surveys of consumer confidence might suggest so.

The University of Michigan’s measure dropped by 1.7 points to its lowest level since January, while the Conference Board’s measure surged by 5.5 points to its highest level since 2000.

While these two surveys tend to broadly track one another over time, monthly divergences are not uncommon and can mostly be tied to methodological differences. The questions asked and the timing of the survey matter most.

{mosads}Overall, though, both surveys are trying to get at how households “feel.” Generally, a household that feels confident about the state of the labor market and its personal finances tends to spend, and consumer spending is roughly 70 percent of the U.S. economy.

So what happened in August? The Conference Board’s survey frames much of its questions around the respondent’s assessment of the labor market, and this appears to be the primary driver of the reported jump in confidence.

Most likely reflecting the continued robust pace of job gains and multi-decade low level of layoffs, the assessment of current labor market conditions rose in August to the highest level since 2001.

This measure matches up well over time with actual labor market conditions, and its elevated level indicates continued downward pressure on the unemployment rate. Indeed, we expect the unemployment rate to have fallen further this month to just 3.8 percent.

The University of Michigan’s survey more directly gets at how consumers feel about current personal finances, which tends to make it quite sensitive to monthly fluctuations in gas prices and the stock market. Yet, stocks were generally higher over the month and gas prices remained relatively stable.

Instead, it was households’ assessment of current buying conditions that plunged — and it can all be tied to rising interest rates. The Federal Reserve has been raising interest rates since December 2015, but the pace has been so slow that it has taken longer than usual for household’s to feel the bite of costlier credit.

It should come as no surprise, then, that the August decline in sentiment was concentrated among households in the bottom third of the income distribution. These folks are much more sensitive to rising interest expense.

Some economists have noted the decline in buying conditions with alarm. After all, the index of home buying conditions fell to its lowest level since December 2008, and the index for buying vehicles fell to its lowest since 2013.

In both cases, respondents blamed rising prices and interest rates. To be fair, these factors may not be mutually exclusive as some buyers might gauge the price by the monthly payment, which would include the interest expense.

More importantly, buying conditions were not considered to be poor because households expected “bad times ahead” or an “uncertain future.”

So before getting too carried away, I think it’s important to note that this is normal. Housing and autos are two interest-rate sensitive sectors, and the drop in buying conditions shows the Fed is doing its job successfully thus far.

The Fed raises interest rates to moderate the economy, primarily through the tightening of credit conditions. The University of Michigan noted as much in its write-up saying, “Overall, the data indicate that consumers have little tolerance for overshooting inflation targets, and to the benefit of the Fed, interest rates now play a more decisive role in purchase decisions.”

In the end, despite the large divergence among the August surveys, both measures show confidence has risen sharply since the financial crisis.

Ellen Zentner is the managing director and chief U.S. economist for Morgan Stanley.