International Forecaster Weekly


In a further signal that the U.S. economy isn’t out of the woods, the widely followed consumer sentiment index that’s produced by the University of Michigan shows that consumer sentiment plummeted in early August.

Guest Writer | August 17, 2021

By Dave Allen for Discount Gold & Silver

In a further signal that the U.S. economy isn’t out of the woods, the widely followed consumer sentiment index that’s produced by the University of Michigan shows that consumer sentiment plummeted in early August.

Falling sentiment suggests trouble for the economy, especially if it means that consumers get tighter with their pocketbooks and trim spending.

Before this month’s reading, sentiment more or less had been improving for much of 2021 — i.e., despite occasional dips, its clear trend has been upward — particularly as the economy heated up heading into July. 

And then…Covid reared its ugly, Delta-infused head, and infections suddenly spiked — and continue to rise in certain parts of the country.

According to preliminary the August survey’s preliminary results, consumer sentiment plunged nearly 15% — from 81.2 in July to 70.2. That beats the lowest level during the pandemic, including last year’s 70.8 reading. 

Indeed, the early August level was the lowest reading since December 2011 and was a lot worse than the 81.0 expected by economists.

This month’s number still isn’t anywhere close to its low during and after the Great Recession — 55.3 in November 2008 and 55.8 in August 2011. But an 11-year low isn’t anything to write home about or to giftwrap and give your spouse for his/her birthday!

Why Is the Survey of Consumers Valuable?

So, what is the consumer sentiment index (officially called the “Survey of Consumers”) anyway, and why is it followed by economists and investors alike?

According to the survey’s website, “The surveys have long stressed the important influence of consumer spending and saving decisions in determining the course of the national economy. 

"The Surveys of Consumers have proven to be an accurate indicator of the future course of the national economy.”

It notes that the Index of Consumer Expectations, produced by the Surveys of Consumers, is included in the Leading Indicator Composite Index published by the U.S. Department of Commerce. 

“The inclusion of data from the Surveys of Consumers…is a significant confirmation of its capabilities for understanding and forecasting changes in the national economy.” 

Each series included in the Leading Indicators composite index is selected because of its performance on six important characteristics: 

Economic significance; statistical adequacy; consistency of timing at business cycle peaks and troughs; conformity to business expansions and contractions; smoothness and prompt availability. 

The Index of Consumer Expectations focuses on these 3 things:

How consumers view prospects for their own financial situation; how they view prospects for the economy over the near term, and their view of the economy’s prospects over the long term. 

The consumer (long-term) expectations index dropped 13.8 points to 65.2 in early August, while the current economic conditions index fell by 6.6 points to 77.9.

Another reason we follow this survey is to better understand investor and consumer expectations and behaviors.

For instance, the response of consumers to the sudden plunge in the stock markets in October 1987 highlighted the importance of consumer expectations. It also suggested that consumer reactions could be different than many analysts expect in any given situation. 

Following the ‘87 crash, the most presumed judgment was that consumer confidence would play a vital role in determining whether a recession would come next. The surprise was that the fear and panic on Wall Street did not spread to Main Street. 

Consumers had a more restrained response, gauging the impact on their own financial situation as limited and the overall effect of the crash as unlikely to spread and bring down the entire economy.

            Again, from the survey website: “Economic optimism promotes consumer confidence and a willingness to make large expenditures and debt commitments. Economic uncertainty breeds pessimism and a desire to curtail expenditures and rebuild financial reserves. 

“When many people change from an optimistic to a pessimistic view of economic prospects at the same time, it has been repeatedly found that a widespread shift toward postponement of expenditures follows. 

“It is in this manner that the economic optimism and confidence of individual families exert their influence on the course of the aggregate economy.” 

Of the August index numbers, CIBC Private Wealth CIO David Donabedian says. “It’s just one data point but sobering. It reinforces our expectations of higher market volatility over the course of the year.”

But Richard Curtin, the survey’s chief economist, believes, “The [huge] surge in negative economic assessments also reflects an emotional response — mainly from dashed hopes that the pandemic would soon end.”

From an economic perspective, emotions are not as impactful as the actual job gainswage gains and investment gains that consumers have been experiencing.

To wit, ING economist James Knightley says, “Sentiment has given misleading signals on spending before and we think it will do again this time.” 

Besides, as Sam Ro correctly observes, “what consumers say or feel doesn’t necessarily match what consumers do.” 

In fact, early evidence from corporate earnings calls and credit card data suggest that recent consumer spending activity has been relatively stable.

To be sure, government-mandated restrictions — particularly renewed shutdowns — would be bad for activity. But Knightly adds, “We are also highly doubtful that we will see new lockdowns happen in the U.S., given high vaccination numbers that continue to rise.”

The July retail sales report, which will be released tomorrow (Tuesday), will provide a comprehensive — but early — read on the Delta variant’s impact on spending during the month.

But if most of the turn in sentiment turns out to have occurred in August, we’ll have to wait for the end-of-the-month report on September 16th.