US Consumer Sentiment Hits Near-Record Low as Inflation Fears Mount
It is yet another day marked by a historically weak assessment of American sentiment regarding the economy. However, this occurrence is taking place just prior to the midterm elections. The University of Michigan’s closely monitored consumer sentiment index decreased to a preliminary reading of 46.3, down from 48.1 in September. If Friday’s lower-than-expected reading were to hold, it would signify yet another historically weak sentiment reading, establishing a new second-lowest figure on record. Those records extend back 74 years, indicating that Americans are experiencing a greater sense of discontent now than they did during the Vietnam War, the oil crisis of the 1970s, the events of 9/11, the Great Recession, the Covid-19 pandemic, and the subsequent inflation surge. Indeed, this year has witnessed five of the lowest readings on record, with May marking the lowest point. “It just underscores how tough people are feeling out there, and it obviously doesn’t particularly bode well for the Republicans as we rapidly approach the midterm elections,” said James Knightley. In recent months, petrol prices have risen, inflation has gained momentum, and interest rates have begun to increase once more. Sentiment has remained unfavourable for an extended period, with Americans’ pessimistic views regarding the economy and persistently elevated inflation playing a significant role in the Republicans’ acquisition of control in the most recent election, as observed by economists and commentators.
The low sentiment, however, appears to contradict a multitude of metrics that indicate the economy is functioning adequately. Knightley attributes the breakdown in the relationship between sentiment and spending to the “K-shaped” economy narrative, wherein high-income households increasingly serve as the primary drivers of US consumer spending. He referenced Federal Reserve data indicating that the top 20% of households, defined as those with an annual income of $155,000 or more, possess over 70% of the wealth in America, while these households are responsible for 40% of all spending. “If the stock markets keep moving along quite nicely, we can keep these trends in play,” he said. “But if we were to see a stock market correction at a time when you’ve still got stress elsewhere, that could really undermine the US growth story.” However, it may be simplistic to dismiss Friday’s report as merely another disappointing sentiment indicator; it raises significant concerns regarding Americans’ capacity and willingness to maintain their spending habits, Knightley noted. “We’ve got these ‘is it a good time to buy’ categories and 73% think it’s a bad time to buy a household appliance; 78% think it’s a bad time to buy a vehicle; and 87% think it’s a bad time to buy a home,” he said. “These are all key drivers of economic activity.”
Friday’s report indicated that the overall consumer sentiment index experienced a decline, primarily influenced by individuals’ pessimistic perceptions regarding the current economic landscape: This metric fell by 12.2% from September, reaching an unprecedented low of 44.7. A decline in sentiment among respondents identifying as independents has more than offset the increases observed among Democrats and Republicans, stated Joanne Hsu, director of the university’s Surveys of Consumers. Some of the most significant reductions were observed among lower-income consumers and individuals with minimal engagement in the stock market. “Frustration over cost-of-living continues to mount, as consumers across the political spectrum believe that the trajectory of the economy has weakened since the beginning of the year,” she said. September’s report indicated a deterioration in respondents’ perceptions regarding the government’s economic policy. Hsu noted that the decline in favorability was particularly significant among Republicans. In September, 35% of respondents indicated that the government was performing well regarding economic management, a notable decline from the 62% recorded in March.
Survey respondents also anticipate a deterioration in inflation levels. Year-ahead inflation expectations have increased to 4.7%, up from the previous 4.6%. In February, prior to the onset of the conflict with Iran that drove up petrol prices, inflation expectations stood at 3.4%. Consumers’ expectations regarding the trajectory of future price increases are meticulously monitored by the Federal Reserve, which raised interest rates last month for the first time in three years. If individuals hold the belief that prices will perpetually increase, they may choose to increase their current spending and seek higher wages. In response, businesses could elevate prices to meet the heightened demand and wage expectations, consequently contributing to an increase in inflation. The latest official reading on inflation is set to be announced next Wednesday with the release of the Consumer Price Index for September. Economists anticipate that annual inflation likely increased last month to 3.6%, marking a four-month peak.
