Even Though Inflation Was Lower In November, Consumer Sentiment Dropped Sharply

According to a carefully monitored sentiment index released on Friday, consumers are significantly less optimistic about the current status of the economy and where things are headed. This is due to higher interest rates, a likely recession, and consistently high prices.

In November, the University of Michigan Survey of Consumers reported a value of 54.7, which was 8.7% lower than the reading of 59.9 from the previous month. That was far lower than the Dow Jones prediction, which called for little change at 59.5.

The current economic circumstances index decreased 11.9% to 57.8 along with that reading. Consumer expectations, a measure of respondents’ expectations for the next six months, fell 6.2% to 52.7.

The headline index reading decreased 18.8% on an annual basis, while the measures of current conditions and future expectations also decreased by 21.5% and 17%, respectively. The consumer price index increased by 0.4% in October, less than the 0.6% projection, according to the Bureau of Labor Statistics, according to a publication from the University of Michigan one day earlier. That information sparked a ferocious rise on Wall Street, where there was widespread belief that the Federal Reserve could slow the rate of interest rate increases now that inflation is beginning to level off.

According to Jim Baird, chief investment officer of Plante Moran Financial Advisors, “now, both inflation and increasing borrowing prices are constraining household expenditures.” “Heavier costs for necessities constrain discretionary spending for low-income households in particular, compress savings, and contribute to higher credit card debt.”

The poll found a specific decline in attitudes against spending on durable goods, which include expensive things like televisions, kitchen equipment, and cars. As a result of consumers’ concern over growing borrowing costs and high prices, the index for that category dropped by 21%.

Purchases of durable goods have been declining for the past two quarters after surging during the early stages of the Covid epidemic. This decline started around the middle of 2021.

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Better news on October’s inflation didn’t arrive in time to lift mood, which unexpectedly fell, according to Baird. Although the economy may not be in a recession, many households are experiencing it because of the burden of rising costs.

Despite October’s CPI figure, which indicated that year-over-year price growth increased by 7.7% as opposed to 8.2% the month before, inflation expectations grew somewhat in the month.

The five-year gauge increased to 3%, the highest level since June, while the one-year inflation prediction increased to 5.1%, the highest level since July. For the majority of the year, the figures have been in a narrow range, beginning in 2022 at 4.9% and 3.1%, respectively.

But those come at a time when the Fed has raised its benchmark interest rate by 3.75 percentage points since March, making them excessive by historical standards. According to a survey released on Friday, consumers, whose spending accounts for 68% of U.S. GDP, are cautious as we enter the crucial holiday shopping season.

When petrol prices peaked earlier this year at well above $5 per gallon, consumers were still able to keep their heads above water, according to Paul Ashworth, chief North American economist at Capital Economics. However, considering that the household saving rate is already at an abnormally low level, it will be more difficult for them to ignore high interest rates.

As concerns about a possible U.S. recession increased in June, the sentiment index fell to an all-time low. The third quarter’s GDP growth of 2.6% annualized helped to ease some consumer concerns of a contraction after the first two quarters’ negative readings, but many experts still predict that the United States would have a recession in 2023.

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