Sep 19, 2023
That’s far higher than the Federal Reserve’s inflation goal of driving the annual rate down to 2%. Looking over the next 5-10 years, consumers’ expectations for the economy have risen for the long run outlook as well, reaching its highest level since April 2024 and lifting 4% above its historical average. Unemployment expectations also became more favorable in September, with an increasing share expecting overall unemployment to fall during the next year. Central bankers specifically focus on longer-run inflation expectations, which didn’t rise this month as much as the short-run expectations figure did, up to 3.5% in February from 3.2% in January. “While sentiment fell for both Democrats and Independents, it was unchanged for Republicans, reflecting continued disagreements on the consequences of new economic policies,” she said.
Traders, though, are pricing in 0.75 percentage point of interest rate cuts by the end of the year, starting in June, according to the CME Group’s gauge of futures pricing. In addition, fears grew over where inflation is headed as President Donald Trump institutes tariffs against U.S. trading partners. New duties on aluminum and steel took effect Wednesday, and the president this week also threatened 200% tariffs on European Union liquor after the EU hit U.S. whiskey and other goods with 50% levies. The survey posted a mid-month reading of 57.9, which represents a 10.5% decline from February and was below the Dow Jones consensus estimate for 63.2. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader.
Investors should look at the stocks of car manufacturers, home builders, and other retailers that typically see sales rise when the economy begins an expansion period. Several major economic indices and indicators can help investors and economists predict where the economy is headed. The Consumer Price Index (CPI), the Producer Price Index (PPI), and the Gross Domestic Product (GDP) all forecast the future strength of the U.S. economy. The Michigan Consumer Sentiment Index is another key indicator designed to illustrate the average U.S. consumer’s confidence level.
More than half of consumers expect unemployment to rise in the year ahead, the highest share since the pandemic recession. The preliminary report is generally released during the middle of the month and covers survey responses collected in the first two weeks of the month. Whether the sentiment is optimistic, pessimistic, or neutral, the survey signals information about near-term consumer spending plans.
The minimum monthly change required for significance at the 95% level in the Sentiment Index is 4.8 points; for the Current and Expectations Index, the minimum is 6 points. The minimum monthly change required for significance at the 95% level in the Sentiment Index is 4.8 points; for the Current Index and Expectations Index, the minimum is 6 points. The Michigan Consumer Sentiment Index was created in the 1940s by Professor George Katona at the University of Michigan’s luno exchange review Institute for Social Research. His efforts ultimately led to a national telephone survey conducted and published monthly by the university.
“While there are some signs that consumers perceive a slight deterioration in labor market conditions, they do not expect substantial effects on the economy,” Hsu said. “Consumers recognize that labor markets have been relatively strong, and they expect that the Fed will step in to prevent unemployment rates from spinning out of control. This month’s stock market gyrations, led by the largest one-day drop in nearly two years seen on Aug. 5, had little net effect on consumer sentiment. Only consumers with the top tercile of stock holdings saw any declines in sentiment, down only 3% from last month. These patterns reflect a sea change in election expectations this month with Harris emerging as the Democratic candidate for president, Hsu said.
As a result, expectations for inflation have risen, intensifying uncertainty about the economy’s future direction. Several factors contributed to this decline, including concerns over inflation, stock market volatility, and ongoing uncertainties related to global trade policies. The expectations index, which measures future consumer outlook, saw a significant drop of 15.3% on a monthly basis and 30% compared to the same period in 2024. A decline in consumer sentiment can indicate reduced consumer spending, which is a crucial driver of economic growth. Conversely, an increase suggests that consumers are more willing to make significant purchases, positively impacting businesses and markets.
A recent Federal Reserve Bank of Atlanta economic forecast indicated a potential 2.4% contraction in GDP for the current quarter, raising concerns about the economy’s ability to sustain growth in the coming months. Additionally, major retailers like Target, Walmart, and Delta Air Lines have issued cautious outlooks, citing consumer financial strain. Interestingly, despite the weak consumer sentiment numbers, stock indices remained relatively stable, and Treasury yields moved higher. However, persistent market fluctuations can impact spending behaviors, as individuals may feel less financially secure due to declining investment values. The consumer confidence measures were devised in the late 1940s by Professor George 11 sectors of the stock market Katona at the University of Michigan.
The latest decline in consumer sentiment was driven by worries over Trump’s tariffs potentially jacking up prices. Survey data indicated that the decline in consumer sentiment was observed across all political affiliations, with expectations falling 10% among Republicans, 24% among Democrats, and 12% among independents. This suggests that economic anxieties extend beyond partisan lines, affecting the broader population. Views of personal finances broadly deteriorated this month as well, with almost 40% of consumers blaming high prices for eroding their living standards. Although a majority of consumers expect their incomes to rise, only 16% expect their income gains to outpace inflation, yet another sign of their worries over the trajectory of prices. Consumers expressed unease about multiple economic factors for the year ahead, providing headwinds for consumer sentiment and spending.
Sentiment appears to be building some momentum as consumers’ expectations for the economy brighten, she said. In reality, it was a combination of factors, such as pandemic shocks to supply and demand and the Russia-Ukraine war. The Trump administration’s aggressive approach to tariffs is a key reason why attitudes about the economy are souring, according to various consumer surveys and polls. The one-year outlook spiked to 4.9%, up 0.6 percentage point from February and the highest reading since November 2022. At the five-year horizon, the outlook jumped to 3.9%, up 0.4 percentage point for the highest level since February 1993. Erika Rasure is globally-recognized as a leading consumer economics subject matter expert, researcher, and educator.
Meanwhile, inflation expectations increased, with the year-ahead gauge climbing to 4.9%, the highest value since November 2022, from 4.3%. Also, inflation predictions for the next five years soared to 3.9% from 3.5% in February, the greatest month-over-month increase observed since 1993. So far, the administration has implemented 10% across-the-board tariffs on all Chinese goods and announced 25% tariffs on all steel and aluminum imports, with no exceptions. It is also studying how best to apply “reciprocal tariffs” on America’s trading partners, which could come in early April.
In contrast, consumers with smaller holdings or no stock holdings at all reported increases in sentiment since July. These patterns are consistent with recent periods of financial turbulence, like the failure of Silicon Valley Bank in 2023, which similarly generated little movement in overall sentiment, Hsu said. After four straight months of declines, consumer sentiment in August inched up 1.5 index points above July, according to the University legacy fx review of Michigan Surveys of Consumers. Federal Reserve Chair Jerome Powell has emphasized that the central bank’s decisions will be based on the overall economic landscape, which includes growth trends, employment data, and inflation metrics. The Fed aims for a 2% inflation target, but the current rising expectations may complicate its policy approach.
This indicator is important to retailers, economists, and investors, and its rise and fall has historically helped predict economic expansions and contractions. Consumer sentiment is a statistical measurement of the overall health of the economy as determined by consumer opinion. It takes into account people’s feelings toward their current financial health, the health of the economy in the short term, and the prospects for longer-term economic growth, and is widely considered to be a useful economic indicator. U.S. consumer sentiment swooned in March to a more than two-year low, with a preliminary gauge released by the University of Michigan proving far weaker than economists had expected. When asked whether unemployment or inflation will pose the more serious problem for consumers in the next year or so, about 42% of consumers chose inflation, down from 53% just four months ago. Furthermore, consumers expect inflation to continue slowing over the course of the next year, Hsu said.
The repeat surveys help reveal the changes in consumer sentiment over time and provide a more accurate measure of consumer confidence. The survey also attempts to accurately incorporate consumer expectations into behavioral spending and saving models in an empirical fashion. The survey results suggest that political and economic policies significantly impact consumer confidence. The imposition of new tariffs on steel, aluminum, and other imported goods by the Donald Trump administration has fueled concerns about inflation and potential trade wars.
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