Consumer sentiment falls as outlook worsens

REAL ECONOMY BLOG | November 11, 2022

Authored by RSM US LLP

The University of Michigan’s consumer sentiment index declined by a sharp 5.2 points to 54.7 in the first half of November, slightly above the all-time low in June at 50, according to survey data released Friday.

Both sentiment over current conditions and future expectations deteriorated significantly, most likely because of the recent rise in gasoline prices, inflation concerns and recession fears.

Inflation expectations have remained the most important subcomponent of the index in recent months, closely watched by the Federal Reserve as it tries to keep inflation expectations anchored.

With increasing signs that inflation is slowing down, the Fed’s focus now is how to bring inflation down fast enough to avoid it becoming entrenched.

November’s data does not offer any help for the Fed as expectations for inflation in both the near term and long term increased.

Consumers expect inflation to be 5.1% in 12 months and 3.0% in the next five to 10 years; both were 0.1 percentage point higher than October’s readings.

While Thursday’s data on the consumer price index showed inflation coming in cooler than expected at a 7.7% annual rate, we remain cautious as both service and shelter components will most likely stay sticky for quite a while.

On top of that, as we approach a key date in the pay raise and promotion cycle—around January—wage growth will continue to keep the Fed on alert.

Underneath the top-line data, consumers showed less appetite to spend on big-ticket items in November, likely because of higher interest rates and higher prices.

Retirement has become less attractive, reaching that measure’s lowest point since 2013, as inflation eats into savings and pensions as the economy slows.