As an aside, the University of Michigan just released its preliminary Consumer Sentiment Index estimate. This reflects a steep drop to 55.4 in September, down from August’s 58.2. This drop represents a significantly more negative mood from US consumers in regards to their individual financial status and the state of the economy as a whole. Analysts were expecting a small drop to 58.0, but the news has turned out even worse than that.
Those new, revised figures paint a stark picture of that trend, as consumer sentiment dropped even further this month. The survey collects consumer expectations for their personal financial situation, as well as short-term economic and business conditions. These revelations are important barometers of economic health and spending intentions. Consumer sentiment is the main driver of US Gross Domestic Product (GDP). Consequently, it is likely this decline will have broader impacts on undermining economic growth.
Deteriorating Consumer Outlook
As of September, US consumers are suddenly much more pessimistic about the economic outlook. In fact, their sentiment levels are down almost 15% from August of last year. This is due in part to a combination of reasons, including a cascade of discouraging employment numbers that have come out in the past few weeks. The quickly worsening job market has probably forced consumers to take a hard look at their finances and future consumption plans.
Beyond jobs worries, inflation expectations are the other big millstone around the neck of consumer sentiment. The University of Michigan Consumer Inflation Expectations jumped to 3.5% in August, rising from 3.4% in July. This increase is an early indication that consumers may be expecting higher inflation in the months ahead. The one-year consumer inflation expectation has remained stuck at 4.8%. At the same time, the five-year outlook jumped to 3.9%, up from 3.5% just a few months ago.
These increasing inflation expectations could deepen the disappointing mood seen among consumers. At a time when Americans are already bracing for more expensive living, consumers will be less able—and less willing—to spend. This cut in spending would undermine much-needed economic growth.
Implications for Monetary Policy
The Federal Reserve’s operational flexibility in addressing these dramatic shifts in consumer sentiment will be key focus of policymakers. As you probably know, the central bank uses changes in interest rates as its primary tool for bringing about strong, stable economic activity. Consumer sentiment has soured considerably. Given this confluence of disappointing employment data and moderate inflation, the stage is set for the FOMC to restart its monetary easing cycle.
Friday’s release of Consumer Sentiment data only adds to the case for Fed easing measures. Lower consumer confidence usually indicates lower consumer spending, and lower consumer spending means a slower rate of GDP growth. If consumers continue to hold back on spending, the Fed will have no choice but to act. For one thing, they could lower the cost of borrowing to boost economic activity.
In the past, the Federal Reserve has responded to any declines in consumer confidence. In response, they push through policy changes to spur consumer spending and business investment. Recent data has led to some interesting speculation among analysts. They are counting on the country’s central bank to announce further measures to ease their tune and spur economic growth.
A Broader Economic Perspective
The Sentiment Index is typically released along with the Consumer Expectations Index and Consumer Inflation Expectations. Together, they give an interesting and complete picture of how consumers are feeling. The relationship between these indices is important and gives us key hints as to what we can expect for the future direction of the US economy.
Here we are in mid-September, and it’s becoming clear that consumer sentiment is picking up right where it left off: down, down, down. This rapid decline would normally raise alarm bells about the sustainability of this economic growth. That’s a big deal, especially given increasing concerns about inflation and soft employment figures. Consumer sentiment is hugely influential to GDP. As such, all stakeholders will need to keep a careful eye on these emerging developments.