A year before the pandemic hit the U.S., consumer sentiment was on the rise, eventually hitting the 101 mark in February 2020 before abruptly falling to 89.1 and then 71.8 over the next two months.
The latest consumer sentiment index declined by 9.4% to 59.1 from 65.2 in April, reversing gains realized last month.
The 59.1 represents a 59% fall from its pre-pandemic peak and is the lowest reading since August 2011.
What is the Consumer Sentiment Index?
By Dave Allen for Discount Gold & Silver
A year before the pandemic hit the U.S., consumer sentiment was on the rise, eventually hitting the 101 mark in February 2020 before abruptly falling to 89.1 and then 71.8 over the next two months.
The latest consumer sentiment index declined by 9.4% to 59.1 from 65.2 in April, reversing gains realized last month.
The 59.1 represents a 59% fall from its pre-pandemic peak and is the lowest reading since August 2011.
What is the Consumer Sentiment Index?
The University of Michigan’s Consumer Sentiment index (CSI) is a monthly survey of at least 500 households that gauges consumer expectations about the economy.
More specifically, the CSI is a leading indicator that seeks to find how consumers view their own financial situation, the short-term economy and the long-term economy.
Along with the Conference Board’s Consumer Confidence Index, the CSI is intended to show whether consumers’ attitude toward spending is getting better or worse over time.
The CSI and other economic indices can help investors and economists predict where the overall economy is headed.
Consumers who feel more confident about the economy generally also feel better about their employment prospects and are therefore more willing to buy houses, cars, appliances, and other items.
Conversely, when consumer confidence is low or falling, they tend to buy less, contributing to slower economic growth.
The dollar's value also tends to fluctuate with the rise and fall of the CSI, so traders and speculators can take positions to profit from sudden moves that may occur when the index is posted every month.
The CSI is generally calculated by subtracting the percentage of unfavorable household replies from the percentage of favorable ones, plus 100 (the index is normalized to have a value of 100 in the 1st quarter of 1966).
May Declines Broad-Based
The May index declines were broad based – for current economic conditions as well as consumer expectations plus, they were visible across income, age, education, geography, and political affiliation.
That continues the general downward trend in sentiment over the past year when it was about 29% higher (at 82.9).
Consumers' judgment of their current financial situation relative to a year ago is at its lowest reading since 2013, with 36% of consumers attributing their negative assessment to inflation.
The index of current economic conditions was down 8.4% from April (at 63.6) and down 28.9% from a year earlier.
The index of consumer expectations was down even more, 9.9% from April (at 56.3), and down 28.6% from May 2021.
Buying conditions for durables reached its lowest reading since the question began appearing on the monthly surveys in 1978, again primarily because of high prices.
The median expected year-ahead inflation rate was 5.4% – virtually unchanged over the last three months and up from 4.6% a year ago.
The average, however, was considerably higher at 7.4%, reflecting substantial variation in price changes across types of goods and services, and in household spending patterns.
At the same time, long term inflation expectations remain fairly static, with a median of 3.0% – within the 2.9 to 3.1% range experienced over the last 10 months.
Shortages and inflation are creating widespread hardships in the country — and midterm headwinds for Democrats, who control the White House and both chambers of Congress.
Does Falling Sentiment Foretell a Recession?
Who knows, right (other than Jay Powell and his Fed compadres, perhaps)?
But interestingly, consumers’ subjective assessments in the past have shown a close relationship to actual developments in the national economy, namely GDP growth.
In fact, since 1960, household appraisals indicate a high degree of correlation with actual changes in real GDP – 0.90 (UMCSI).
Various other academic studies have looked at this relationship as well. One of them concluded that consumer spending increases when consumers are optimistic about their financial future (Curtin, 2007).
On the other hand, personal savings increase when consumers become pessimistic in this respect (Curtin, 2007), and these impact the economy at large (Nguyen & Claus, 2013; van Oest & Franses, 2008).
Consumer sentiment is influenced by certain macro developments like economic growth, employment and jobless levels, the stock market, exchange rates, oil prices and interest rates (Curtin, 2007; Deaton, 2012; Vuchelen, 1995, 2004).
Media coverage about these developments is also a major influencer (Hollanders & Vliegenthart, 2011; Nguyen & Claus, 2013; Ramalho, Caleiro & Dionfsio, 2011).
The relationship between macroeconomic variables and the physical and psychological health of consumers is less well established (Smith, 1999), especially at the individual level.
You know what the CYA types say: past isn’t prologue; i.e., past performance is not a guarantee of future results.
Yet, more and more economists are starting to warn that the Fed’s 2022 tightening policy is likely to put the country into a 2023 recession (if not before).
Yesterday, Lloyd Blankfein, senior chair and former CEO of too big to fail Goldman Sachs, said he sees "certainly a very, very high risk factor" of recession:
"If I were running a big company, I would be very prepared for it. If I was a consumer, I would be prepared for it."
But I believe we’re still a few summer months away from having the crystal ball come into stronger focus.
When it does, however, the eventual downturn will be longer than the one that passed by in 2020 with the blink of an eye and will be better for gold and silver.