Americans Most Pessimistic About Finances Since ‘Mid-1940s’

Consumer sentiment in the US sank to a new decade low and inflation expectations jumped to the highest in more than four decades as Americans added war to an already long list of pressing concerns.

The preliminary headline print on the University of Michigan’s gauge for March was 59.7, down from 62.8 the prior month (figure below).

It was the third consecutive monthly decline and the fifth in six. “Consumers held very negative prospects for the economy, with the sole exception of the job market,” the survey said.

This is an ongoing debacle and bodes poorly for Democrats in the midterms. Not that Republicans have done anything for voters lately either, but those in power tend to get the blame. That’s just how it goes. The only saving grace for Democrats might be that the partisan divide is now so entrenched — the battle lines so clearly drawn — that the number of fence-sitters could be much lower than any official count of Independents would have you believe. It’s difficult to image anyone who harbors even an inkling of respect for voting rights supporting the GOP at this juncture, for example.

In any event, both the current conditions and expectations gauges fell in early March. “The greatest source of uncertainty is undoubtedly inflation and the potential impact of the Russian invasion of Ukraine,” Richard Curtin, chief economist for the Michigan survey, remarked. Almost one in four respondents spontaneously mentioned the Ukraine invasion when responding to questions about the economic outlook.

Whether or not inflation expectations are becoming unmoored is a matter of metric and opinion at this juncture. It’s true that most measures of medium-term expectations remain relatively subdued, but one has to wonder if we’re on the brink of a sea change. Consumers can only countenance so much before their mindset shifts. The figure (above) gives you a sense of where various metrics currently stand on the eve of Fed liftoff and amid one of the most spectacular commodity rallies in history.

As alluded to above, the 5.4% print on the year-ahead Michigan gauge (purple line in the figure) was the highest since 1981.

“Personal finances were expected to worsen in the year ahead by the largest proportion since the surveys started in the mid-1940s,” Curtin went on to say Friday.

Real income expectations are in free fall (figure above).

Although policymakers are still loath to admit that a wage-price spiral may have set in, Curtin harbors no such reservations. On Friday, he described “unrelenting pressures on aggregate demand and supply lines,” before detailing what he characterized as a game of musical chairs. To wit:

The persistent strength in demand was a critical factor that shaped the last inflationary age from 1965 to 1982, with stagflation peaking only near its end. Current expectations are consistent with heightened pressures on wages to meet the continued growth in demand. Like the game of musical chairs, everyone continues racing around the circle of rising prices and higher wages. Although everyone knows the game will end, everyone still wants to obtain the highest income possible before they exit. The game is moderated by fiscal and monetary policies, which now favor increased federal spending and full employment over price stability, enabling ever more rounds of the game.

That’s not exactly comforting. With the war now virtually guaranteed to push prices for energy and food higher still, it’s going to be more challenging for wage growth to keep pace with consumer prices.

On Thursday, Janet Yellen suggested wages are still outstripping inflation at the low-end of the scale. But the definition of “low-end” will likely need to be ratcheted ever lower in order for that assessment to remain true. It’s not possible for firms to raise wages every month for high-paying occupations, especially when other input prices are surging too.