Americans are the most pessimistic about their personal finances in more than a half-decade.
That was one takeaway from the final read on the September vintage of the University of Michigan’s consumer sentiment survey.
“The proportion of households who expected to be better off financially in a year fell to 30% in September, the lowest level since August 2016,” chief economist Richard Curtin said Friday.
The headline print on the sentiment index moved slightly higher from the preliminary read, and beat expectations. But at 72.8, it’s hardly ebullient. Indeed, it’s still near the decade low hit in August when consumers began to fret over rising costs and the spread of the Delta variant.
Inflation jitters are pervasive, but Curtin suggested policymaker messaging is working — perhaps too well.
“Consumers do not view economic conditions as conducive to establishing an inflationary psychology,” he said. “Instead, consumers have favored postponement due to what they still consider a transient spike in prices.”
On one hand, that’s good news to the extent a dangerous inflationary mindset isn’t setting in. On the other hand, Curtin noted that “the shift toward postponement of purchases has been so significant that it could not be quickly reversed.”
That doesn’t bode well for consumption over the near-term.
Even as consumers are apparently still clinging to the “transitory” narrative, living standards (or the perception thereof) are deteriorating. Just 18% of households expect real income gains (figure below).
That’s the worst read in more than a half-dozen years.
You’re reminded that buying attitudes are abysmal. In fact, they’re near the lowest ever recorded for homes, vehicles and durables. The latest Case-Shiller data betrayed yet another huge annual price increase, with home values rising 20% in July. Within the 20-city gauge, prices in 19 cities were at records. On Friday, data for August showed the Fed’s preferred inflation gauge accelerated to a 30-year high.
Curtin noted that, somewhat ironically, households’ declining expectations about financial progress may help keep inflation in check by short-circuiting the self-fulfilling prophecy that can create a price spiral. “Annual gains in household incomes were just 1.5% in September, well below the expected 4.6% inflation rate,” he wrote.
Of course, one way to inoculate yourself is to own stocks. There’s just one problem with that strategy, and it’s illustrated poignantly in the familiar figure (below).
The benefits of rising stock prices don’t accrue in linear fashion. They accrue exponentially. If you’re in the bottom 90%, you’re on the wrong side of that equation.
Of course, even if you don’t have a multi-million-dollar portfolio of financial assets, you might own a home. Considering how rapidly home prices are rising, you may be able to keep up with inflation that way. Real estate values jumped $1.2 trillion in the second quarter, data out last week showed. Not quite the $3.5 trillion gain logged by corporate equities, but a nice windfall nevertheless.
But, as Bloomberg put it, “for many renters, the sharp rise in housing prices pushed the reality of owning a home further out of reach.” In the meantime, a Zillow index based on the mean of listed rents surged nearly 12% in August from the prior year (figure below).
In some locales, rents jumped 25%. Renters trying to save for a downpayment are thus being squeezed on two fronts. Home prices are surging and rents are too. The latter makes it more difficult to save, while the former raises the amount that needs to be squirreled away.
Those looking to lawmakers for help are likely to be disappointed. Or, wait, scratch that. I’ll rephrase: Those looking to lawmakers for help should know better.
“While the decline in real income expectations has been tempered by more generous pandemic relief, partisan wrangling… is likely to only lengthen the period of uncertainty about federal policies,” the University of Michigan’s Curtin remarked.
Interesting that “expect better off 5 yr” has always been well below 50% and “expect real income gains” has always been well below 30%, even during the height of pandemic spending and house buying volumes.
Below link reports change in spending and income 2018+19 to 2019+20 by income quintile. Note what each quintile spends on. Truly discretionary spending, i.e. most of what is reported as “retail spending”, is a small part of total household spending.
As such, I suspect the largest part of changes in household spending is explained by changes in non-discretionary spend (housing, transportation, food) which are in large part “forced on” households. The discretionary spending is the small remainder, and I suspect changes in discretionary spending is explained as much by how much income is left over (i.e. changes in income less non-discretionary spend) as by consumer sentiment (optimism or pessimism).
https://www.bls.gov/news.release/pdf/cesmy.pdf
Put another way, if rent-gas-food are going up [down] and if income is going down [up] likely has as much or more effect on whether discretionary spending goes down [up], as consumers’ sentiment.
No proof for the above, just my hypothesis. But in all the years I traded retail stocks, I didn’t find consumer sentiment surveys to be a reliable predictor for same store sales; so I am pre-disposed to think that other things are larger factors.