Consumers reported a stunning loss of confidence in June the preliminary University of Michigan Index of Consumer Sentiment showed. The index in June dropped to 50.2 (consensus 59.0) from the final reading of 58.4 for May. The June reading compares to 85.5 in the same period a year ago and is the lowest reading ever on records dating back to 1978. Inflation pressures are seriously undermining consumer sentiment. The losses in confidence were widespread across income, age, and education subgroups and observed across all regions.
The University of Michigan’s data showed consumers anticipate inflation will rise 5.4% over the next year, matching March and April’s readings and marking the highest levels since 1981. The losses covered all aspects of the economy, from personal finances to prospects for the economy, including inflation and unemployment.
Chart via: The Author of the Future- El Escritor del Futuro – Antonio Pérez-Algás @apanalis
University of Michigan: Consumer Sentiment reached a record high of 112.00 on January of 2000 and a record low of 50.20 in June of 2022.
Highlights US Univ. Of Michigan Sentiment June 2022
- US Univ. Of Michigan Sentiment P: 50.2 (est 58.1; prev 58.4)
- Current Conditions: 55.4 (est 62.9; prev 63.3)
- Expectations: 46.8 (est 55.3; prev 55.2)
- 1-Year Inflation: 5.4% (est 5.3%; prev 5.3%)
- 5-10 Year Inflation: 3.3% (prev 3.0%)
There is little doubt that inflation, housing affordability, continuing political nastiness and incompetence has been met with a mixture of reason and emotion. Inflation has put added pressure on living standards, especially on lower- and middle-income households, and caused postponement of large discretionary purchases, especially among upper income households. Consumers’ complaints about rising prices on homes, vehicles, and household durables has reached an all-time record.
Household Net Worth Declined
Sentiment was also hurt by household assets contracting $260 billion during Q1 to $167.917 TN. With Household Liabilities increasing $284 billion to $18.638 TN, Household Net Worth declined $544 billion to $149, 279 TN.
Nevertheless, Household Net Worth was up $12.706 TN (9.3%) over one year and $37.830 TN (33.9%) over three years, in history’s greatest inflation of perceived wealth. That is the key ‘percieved wealth’
Household Net Worth-to-GDP declined to 612% (from 624%). But this compares to 491% at cycle peak Q1 2007, and 445% during peak Q1 2000. Years of asset inflation have fueled a consumer spending boom. The downside of the cycle will see sinking asset prices and tightened Credit conditions significantly restrain household spending.
“The double whammy of surging mortgage rates and skyrocketing home prices has led to ‘collapsed’ housing affordability in America, according to Chris Flanagan’s team at Bank of America… The situation has gotten so bad that it now compares to the ‘historically low affordability readings’ in the fourth quarter of 1987 and the first quarter of 2005, according to the B. of A. team. Notably, those years coincide with the ‘Black Monday’ stock market crash of 1987, when the Dow Jones Industrial Average tumbled about 22.6% in a single trading session, and the start of the subprime mortgage crisis as home prices roared higher from 2000 to 2005 and hit a multiyear high in 2006.” June 8 – MarketWatch (Joy Wiltermuth)
Signal of Stock Market Weakness
The hard fact that many miss is if consumer sentiment doesn’t quickly improve, it a signal of stock market weakness that would in turn be sparked by disappointing earnings, weaker spending, and higher savings rates. Now in this rampant inflation environment we are seeing savings hit, credit card debt exploding and those glorious stock market gains eroded or even now losses. Not pretty.
The stock market and consumer sentiment usually rise and fall in tandem. Take the manic bull market ultraloose global monetary policy, record levels of fiscal stimulus, and rising earnings forecasts sent stocks to successive highs with manic crowd behavior, greed will do that. These stimulative pumps, plus a pandemic that curtailed social activity, helped U.S. consumers amass more than $2 trillion in savings, even as the labor market tightened, and wages climbed. Those stock market gains made consumers feel bullet proof.
The difference between current readings and future expectations is tightening, suggesting consumers don’t see their concerns as temporary. The confidence gap has persisted.
In a paper last year, David Blanchflower, an economics professor at Dartmouth College and a former external member of the Bank of England’s monetary-policy committee, and Alex Bryson, a professor of quantitative social science at University College London, wrote about what they call “the economics of walking about.”
The idea: that people on the ground possess information about economic trends based on their own experiences and the experiences of those they know, which allows them to assess future economic trends.
Their conclusion: Economic shocks are hard to predict, but qualitative metrics about consumer expectations are predictive of downturns. They show that consumer-expectations indexes from both the University of Michigan and the Conference Board predict downturns up to 18 months in advance in the U.S. They find that all recessions since the 1980s have been predicted by at least 10-point drops in those indexes.
This shift in Sentiment was evident last year well before the stock market peak
The Michigan gauge peaked in June 2021 and fell by 18 points by August, while the Conference Board measure peaked in March 2021 and then fell by 26 points through September 2021, say Blanchflower and Bryson. While they call the economic situation in 2021 “exceptional,” downshifts in consumer expectations in the past six months suggest that the U.S. economy is entering recession now, they say.
“This is a bold call, and not consistent with consensus,” say Blanchflower and Bryson. “However, missing the declines in these variables in 2007, as most policy makers and economists did, proved fatal.”
The reasons behind souring sentiment are at least as important as the decline itself. Back in September last year surveys showed that inflation is consumers’ top concern, even if the Federal Reserve continues to dismiss building pricing pressures.
Widespread shortages mean there is less to buy, but risk lies in assuming that demand is simply delayed. If consumers grow increasingly wary as they wait for cars, houses, and other items to become available — or affordable, potential consumption may be lost.
People also worry about the job market despite ubiquitous help-wanted signs and fast wage growth. Workers may have written off more permanently jobs that became riskier during the pandemic and don’t pay enough to cover costs, as wage gains still haven’t kept pace with consumer price inflation. Many are forging new paths, new-business formation took off, reinforcing the idea that the labor shortage isn’t so temporary.
Source: University of Michigan
From The TradersCommunity News Desk