It’s relatively rare that University of Michigan sentiment moves the proverbial needle, especially during weeks when top-tier economic data is viewed as especially urgent, as this week’s CPI data was.
But, on Friday, the preliminary read on consumer sentiment for August printed what can only be described as a disastrous downside miss. At 70.2, the initial read for this month was nowhere near consensus (81.2) and missed the low-end of the range (78) by a country mile.
The headline read was the lowest since late 2011. The month-to-month plunge was dramatic (figure below).
Both the spread of the Delta variant and inflation expectations contributed to the grim mood.
“Consumers have correctly reasoned that the economy’s performance will be diminished over the next several months, but the extraordinary surge in negative economic assessments also reflects an emotional response, mainly from dashed hopes that the pandemic would soon end,” the survey said.
That’s not a favorable assessment. While year-ahead inflation expectations blipped lower (to 4.6% from 4.7%), longer-term expectations worsened. The expected change in median prices over the next five- to 10 years rose to 3% (figure below).
The additional color from the report was dour. “The losses in early August were widespread across income, age, and education subgroups and observed across all regions,” the survey said, adding that “aversion to higher prices caused consumers to judge buying conditions negatively.”
In fact, favorable ratings for homes dropped to just 30%. For cars, the figure was 31%. For household durables, 43%. Those were all the lowest since the 1980 recessions.
Both the current conditions index and expectations gauges were eviscerated. The former fell to 77.9 from 84.5, while the latter dropped all the way to 65.2 from 79 the previous month. That makes for a rather stark juxtaposition with stocks (figure below).
“Dashed hopes and shattered dreams… but we digress,” BMO’s US rates team wrote Friday, commenting on the data.
Citing last month’s numbers, BofA’s Michael Hartnett noted the extent to which rising costs are weighing on consumer psychology. “45% of US consumers say ‘it’s a bad time to buy’ cars, houses, durable goods,” he wrote, in a Thursday note.
“In light of the correlation between confidence and consumption, the Michigan data is flashing a warning for assuming H2 will be characterized by the strong growth realized thus far in 2021,” BMO’s Ian Lyngen remarked.
BofA’s Hartnett was more blunt. “Inflation is leading to weaker consumption,” he said. “Stagflation is here.”
So is it time to taper now? I say all the time, the FOMC hawks are wrong. There is a lot less downside to being a little bit late, than being too early. Yes they will have to announce a taper in the next 3-12 months. But I do not understand the rush to announcing tapering in September. Likewise I do not undertand the idea of tapering quickly. Small upside if you are right, lots of downside if you are wrong.
The hawks have been squawking so loudly that what they announce in Sept could be underwhelming. Market sighs in relief? Meanwhile, consumer slowing at the margins eases inflation fears, while peaking Delta perks up consumer stock outlooks?
It sure is a big U Mich sentiment miss, but I don’t think consumer sentiment has been a strong incremental (i.e. being what market already knows) indicator – it’s already been clear that big ticket stuff has to take a breather, while consumers’ actually spend on small ticket stuff often doesn’t track what they say. Kind of like we don’t exercise and diet even if we say we should.
I have a hard time thinking of stagflation without higher interest rates. That house, the car, etc. paid out over time with interest rates this low……
As much as we’d argue otherwise, “Chart 6” serves to remind us that there is no such thing as, “off the charts”.
I think the general usage is that it is off the sensible range of the historical chart causing a need to rescale. If your company is doing $100k per period in sales and all the sudden you book a $1,000,000,000 period you can yes easily rescale the chart but you have gone off the bounding of the prior chart range. This has been a TED talk on economic colloquialisms.