US Consumer Sentiment Rises as Households Inflation Expectations Fall

U.S. consumer sentiment rose in early September as it continues to recover from a stunning loss of confidence back in June the preliminary University of Michigan Index of Consumer Sentiment showed. The preliminary August estimate rose to 59.5 (consensus 60.0) versus the final reading of 58.2 for August. In the same period a year ago, the Index of Consumer Sentiment was 72.8. Consumer sentiment has stopped deteriorating, with relief from the drop in gasoline prices.

Consumer sentiment has found some hope since dropping to 50.20 in June, the lowest reading on records dating back to 1952. Inflation pressures are seriously undermining consumer sentiment. The losses in confidence were widespread across income, age, and education subgroups and observed across all regions.

Pensive

The University of Michigan’s data showed consumers anticipate future inflation improved but remained elevated. One-year inflation expectations dropped to 4.6%, the lowest since September 2021, from 4.8% in August. The survey’s five-year inflation outlook slipped to 2.8%, the lowest since July 2021, from 2.9% in August.

Chart via: University of Michigan

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 September 2022

  • Sentiment index 59.5 vs 60.0 expected and 58.2 last month
  • Current conditions 58.9 vs 60.8 expected (prior 55.5)
  • Expectations 59.9 vs 59.7 expected (prior was 54.9)
  • 1-year inflation 4.6% vs 5.0% prior — lowest since last Sept
  • 5-10 year inflation 2.8% vs 3.0% prior — lowest since July 2021
  • The headline was close to expectations but the market is likely going to r

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.

“Lower prices at the pump, combined with potential cresting in annual inflation measures, should allow sentiment to gradually ascend in the months ahead from its record low set in June,” Mahir Rasheed, U.S. economist at Oxford Economics, said in an analyst note

Signal of Stock Market Weakness (and Recovery)

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 

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