Weakening Economic Expectations Pull Down Consumer Sentiment

The preliminary February results from the University of Michigan Surveys of Consumers show overall consumer sentiment fell in early February and remains well below pre-lockdown levels. Deteriorating expectations for the economy was the primary cause.

Overall consumer sentiment decreased to 76.2 in early February, down from 79.0 in January, a 3.5 percent decline (see top chart). From a year ago, the index is down 24.6 percent. The sub-indexes both fell in early February though the drop in expectations was much more significant. The current-economic-conditions index dropped to 86.2 from 86.7 in January (see second chart). That is a 0.6 percent decline and leaves the index with a 24.9 percent decrease from February 2020. The second sub-index — that of consumer expectations, one of the AIER leading indicators — sank 4.2 points or 5.7 percent for the month to 69.8 (see third chart) and is 24.2 percent below the prior year.

All three indexes remain well below the pre-pandemic levels, with the Current Economic Conditions index 23.4 percent below its 2018-2019 average and the Index of Consumer Expectations 20.0 percent below the recent average. Combined, the overall index sits 21.6 percent below the pre-pandemic average.

According to the report, “Consumer sentiment edged downward in early February, with the entire loss concentrated in the Expectation Index and among households with incomes below $75,000. Households with incomes in the bottom third reported significant setbacks in their current finances, with fewer of these households mentioning recent income gains than any time since 2014.”

The report goes on to add, “When asked to assess their current financial position, the deep divisions become apparent: among those with incomes in the bottom third, just 23% reported improved finances, the lowest since 2014; in contrast, among those with incomes in the top third, 54% reported their finances had improved. Mentions of income gains fell to just 17% among those in the bottom third, compared with 44% in the top income third.”

The report suggests that despite the likely approval of another stimulus package, expectations for the economy are weakening, led by lower-income consumers. The divisions among the income cohorts likely reflects the concentrated impact of shutdowns on lower-wage jobs and the thinner cushion lower-income households have against financial difficulties.

Government restrictions on consumers and businesses remain a significant threat to the outlook for economic growth. The development and distribution of vaccines is a very positive factor and should eventually lead to sharply less government restrictions. In the meantime, the longer the virus continues to spread (along with the possibility of mutations prolonging the outbreak), consumers remain restricted, and businesses remain closed or limited, the more uncertain a labor market recovery becomes and the higher the probability of financial hardships contributing to a slow and drawn-out economic recovery.

This article was first published by the AIER, and can be found here.


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