Consumer sentiment collapsed in early February, the preliminary read on the University of Michigan’s gauge showed.
The survey’s chief economist, Richard Curtin, called this month’s decline “stunning.”
At 61.7, the headline print was a veritable disaster. Consensus expected 67. In percentage terms, the MoM drop was the second-largest since the onset of the pandemic (figure below), exceeded only by the decline associated with the Delta wave.
The survey has now registered new decade lows in two of the last four months. And January’s print was the second-lowest in ten years. These readings are virtually unheard of outside of recessions.
The YoY declines are dramatic. The current conditions index is down almost 21% from February 2021, for example.
The culprit: Inflation. Notably, concerns have now climbed the income ladder. As Curtin wrote, “the entire February decline was among households with incomes of $100,000 or more.” The sentiment index for that cohort dove 16.1% in a single month.
A third of all consumers spontaneously cited the impact of rising prices on their personal finances. Almost half expect their real incomes to decline over the next 12 months, which is hardly surprising given the recent trend (figure below).
Year-ahead inflation expectations rose to 5%. Mercifully, 5-10 year expectations were unchanged at 3.1%.
Although I doubt this needs underscoring, consumers are far more concerned about inflation than the labor market. 80% identified higher prices as a bigger concern than unemployment.
“The recent declines have meant that the sentiment index now signals the onset of a sustained downturn in consumer spending,” Curtin went on to say Friday.
This feels somehow gratuitous, but here it is anyway: The Fed is in an impossible position. As bizarre as this might sound considering how rapidly the economy grew in the fourth quarter, a recession is now entirely possible. If you don’t believe that, just ask the yield curve, which has a better track record than every economist on the planet. Or you could just ask respondents to the University of Michigan survey. You know, everyday people. But Jerome Powell is duty-bound to hike rates into that downturn. If he doesn’t, the outcome could be even worse.
Curtin did concede that the large amount of savings accumulated during the pandemic introduces considerable uncertainty into the equation. Any downturn that does materialize may be mitigated by those buffers.
Finally, Curtin noted that consumers were the least disposed to cite rising net household wealth since the pandemic low in May 2020. That was “largely due to the falling likelihood of stock price increases in 2022.”
Remember: The economy isn’t the stock market. Except when it is.
“ But Jerome Powell is duty-bound to hike rates into that downturn. If he doesn’t, the outcome could be even worse.”
I would really appreciate a post that does a deeper exposition of this idea.
+1. What are the parameters of the ‘even worse’ outcome? Who might it be worse for?
This suggests that shock and awe hikes might not be the smartest move- maybe some adjustments like a couple of 1/4 point hikes and we will see what happens makes more sense- no?
A few 25 basis point rate hikes may be all a flattening yield curve allows. If the yield curve inverts and stays inverted for a while then banks lose the incentive to lend and the American consumer depends on cheap and accessible credit. And as the consumer weakens then demand destruction is the result. And if high oil prices persist as the consumer weakens, then we have stagflation. The Fed can steepen the yield curve by balance sheet runoff to increase supply of longer dated treasuries. Please correct any of my assumptions here Mr HeisenB, if they are flawed. Thanks.
Loss of the “wealth effect” from a generation of investors who have been chasing frothy sectors of the market without a significant downturn, perhaps also overspending on housing, then sprinkle in cryptos, etc, will certainly factor into the current investing and confidence equation.
The virus shrunk economic capacity, it makes sense that growth will be handicapped for some time. Removing liquidity in that environment is the only way to keep inflation from spiraling.