Speaking of consumer sentiment, the University of Michigan will be out with its monthly Michigan Consumer Sentiment Index this Friday. Concerning consumer confidence, analysts expect another drop in consumer confidence for the month of October. This expected decline comes despite deepening consumer pessimism about the American economic outlook. This month’s preliminary figures are especially significant. They will be judged against the backdrop of a recent federal government data release shutdown that has left most of the nation’s key economic indicators highly dubious.
The Michigan Consumer Sentiment Index offers successful, actionable examples of how to gain a deeper understanding of consumer sentiment, perhaps the most important sentiment of all. It polls people on their expectations for their own financial situation, their expectations for the business environment and the general business climate. This data is an important bellwether of consumer attitude towards spending, one of the core components driving the U.S. economy. The market consensus is looking for a decrease in the index to 54.2, a good-sized decline from 55.1 in September. This shift is another signal of the ongoing nosedive of consumer sentiment.
Insights from the Index
The Michigan Consumer Sentiment Index operates with two key releases each month: a preliminary report released mid-month and a final print at the end. The preliminary reading often carries more weight, as it provides an early glimpse into consumer attitudes that can influence market behavior. The Print Monthly Estimation Final print is usually more complete data with additional analysis and is published about two weeks after the first release.
Recent cuts are colliding with sharply negative consumer sentiment. It’s currently hovering around 25% below what we saw on average in Q4 of 2019. This historic downturn spells dangerous things for the economy. Consumer spending is the foundation of economic growth. A lower index could mean that consumers are starting to become more reticent to buy. This dramatic shift would severely cramp business’s cash flows and dramatically reduce economic activity across the board.
The survey encompasses three broad areas: personal finances, business conditions, and buying conditions. Together, each of these components show us what consumers are thinking and feeling. They project how those emotional states will shape their behavior as consumers. In fact, consumer spending accounts for around 70 percent of U.S. Gross Domestic Product (GDP). If sentiment suddenly turns more negative this could cause much larger economic effects.
Factors Influencing Consumer Sentiment
The strongest driver of the anticipated drop in consumer sentiment is increasing pessimism over job security and long-term economic stability. Over the last few months, our job market has entered a new, alarming phase. These concerns are weighing on consumer confidence readings. Economic factors such as inflationary pressures and increasing interest rates have played a role in this bleak outlook.
Even the Federal Reserve seems to be preparing for a cut of that magnitude come their October meeting. Analysts say this action will relieve some pressure on consumers. The support for the effectiveness of such measures is unclear even as consumers act to protect their short-term financial concerns. The index’s forthcoming monthly readings will be a key barometer for judging whether these significant adjustments are working their way into any measurable impact on consumer confidence.
“Failure to return above the 1.1600 level is likely to lead to a retest of the descending channel bottom, from mid-September highs,” – Alcalá
Implications for the Future
The consequences of a persistent drop in the Michigan Consumer Sentiment Index are serious. Any further slide in consumer confidence will result in reduced consumer spending, which will likely set off a hard landing by bringing about an economic growth slowdown. Businesses operate on the basis of consumer spending – without it they will struggle with issues like falling sales and profitability.
Those next preliminary numbers from the Michigan Consumer Sentiment Index are sure to send ripples across financial markets. That is perhaps especially true because the recent government data release shutdowns have left many key economic indicators shrouded in confusion. Investors and analysts alike will closely monitor these results for any signs of potential recovery or ongoing decline in consumer sentiment.