Although consumer sentiment edged upward in September, the overall gain still meant the continuation of depressed optimism, according to the University of Michigan Surveys of Consumers.
The relapse in consumer confidence was initially sparked by the Delta variant and supported by an upsurge in inflation and unfavorable long-term prospects for the economy, said U-M economist Richard Curtin, director of the surveys.
During the past five months, consumers have become much more concerned about rising inflation and slower wage growth and their negative impact on their living standards, he said. In addition, consumers have voiced near-record lows in their evaluations of buying conditions for homes, vehicles and household durables. The recent increases in market interest rates are likely to further restrain consumer spending, he said.
"The two characteristics that facilitated the rise in inflationary psychology a half century ago was the widespread belief in personal financial progress as well as the expectation of escalating inflation rates over the longer term," Curtin said. "Neither of those conditions are now true.
"The reaction of consumers to rising prices has been to postpone purchases, given their fears of falling future living standards as well as the presumed transient nature of inflation due to the pandemic. The partisan wrangling about debt ceilings and infrastructure programs, along with rising market interest rates, will produce greater negative spending forces, unless quickly reversed."
Anticipated declines in living standards
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, and favorable finances over the next five years fell to 44%, the lowest level in seven years. Expected annual gains in household incomes were 1.5% in September, one-third of the expected inflation rate. Real income gains were expected by 18% of all households in September, the lowest reading since February 2015.
Price hikes dim spending outlook
Given these developments in income expectations, it should be no surprise that consumers viewed price increases on purchases of homes and vehicles as a cause for postponement, Curtin said.
Favorable views of buying conditions have plunged to half their level in the past year: Favorable buying conditions for homes fell to 32% in September, down from last year's 65%, with the most negative references ever recorded to net home prices in the current quarter. Favorable vehicle buying conditions fell to 30% from last year's 61%, with the number citing net prices the most negative since the original oil embargo in 1974.
Consumer Sentiment Index
The Consumer Sentiment Index posted a small gain in September to 72.8 from 70.3 in August, but remained well below the pandemic peak of 88.3 in April and near the pandemic lows (see the chart). The Expectations Index increased to 68.1 from last month's 65.1 but was still below the pandemic peak of 83.5 recorded three months ago. The Current Conditions Index rose to 80.1 from last month's 78.5, but remained well below the April peak of 97.2.
About the surveys
The Surveys of Consumers is a rotating panel survey based on a nationally representative sample that gives each household in the coterminous U.S. an equal probability of being selected. Interviews are conducted throughout the month by telephone. The minimum monthly change required for significance at the 95% level in the Sentiment Index is 4.8 points; for the Current and Expectations Index, the minimum is 6 points.
U-M Institute for Social Research
