U-M Survey: Consumer Sentiment Continues Free Fall

According to the University of Michigan Surveys of Consumers, consumer sentiment fell in February to its lowest level in the past decade due to inflationary declines in personal finances, rising interest rates, falling confidence in the government’s economic policies, and the most negative long-term prospects for the economy in 10 years.
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African American couple accounting family budget at home, wife scolding her husband for overspending and lack of money
Consumer sentiment continues its free fall, again hitting a decade low in February, according to the University of Michigan Surveys of Consumers. // Stock Photo

According to the University of Michigan Surveys of Consumers, consumer sentiment fell in February to its lowest level in the past decade due to inflationary declines in personal finances, rising interest rates, falling confidence in the government’s economic policies, and the most negative long-term prospects for the economy in 10 years.

The Consumer Sentiment Index fell to 62.8 in the February 2022 survey, down from 67.2 in January and well below last February’s 76.8. The Expectations Index fell to 59.4 in February, down from last month’s 72.0 and 16.0 percent below last year’s 70.7. The Current Conditions Index fell to 68.2, down from last month’s 72.0, and significantly below last year’s 86.2.

Importantly, the loss was still entirely due to a 12.9 percent decline among households with incomes of $100,000 or more, a group that has a significant impact on consumer spending, says Richard Curtin, U-M economist and director of the surveys.

Virtually all interviews for the survey were conducted prior to the Russian invasion of Ukraine, so its impact is yet to be felt by consumers. The most likely linkage to the domestic economy is through rising energy prices and the potential for retaliatory cyber disruptions of the economy. Much is unknown, however, about cyberwars that aim to inflict losses on home fronts rather than battlefields.

“The Russian invasion of Ukraine is likely to increase inflation and job losses. This makes the task of the Fed even more challenging,” says Curtin. “Accelerating inflation has caused financial harm and growing angst among consumers, and prospects for retaliatory cyberattacks could cause added concerns about jobs and access to household funds. This will make finding the balance between the two Fed objectives even more difficult and more critical.

“Clinging to the transient hypothesis meant missed opportunities to nip inflation at its earliest stages. Even more aggressive actions are now needed to avoid the establishment of an inflationary psychology that can act as a self-fulfilling prophecy. Job growth may also be more vulnerable to the disruptions from cyberattacks and consumers may adopt more cautious spending preferences.”

The financial harm and growing angst among consumers about rising inflation have pushed nearly 90 percent of consumers to anticipate interest rate hikes. The Fed’s clinging to the transient hypothesis meant missed opportunities to nip inflation at its earliest stages.

“More aggressive actions are now needed to avoid the potential establishment of an inflationary psychology that forms a self-fulfilling prophecy,” says Curtin. “Nonetheless, the imposition of sanctions against Russia is likely to generate countermeasures that could harm the domestic economy, requiring the Fed to give special consideration to any associated economic slowdown and rising unemployment.”

Consumers evaluated their current financial situation as the worst in nine years, and when asked about their future financial prospects, more households expected worsening finances than any other time since May 1980. Consumers focused on inflation-adjusted incomes, which have turned quite negative: a median expected gain in nominal incomes was 1.9 percent in February, far lower than the anticipated year-ahead median inflation rate of 4.9 percent.

The Surveys of Consumers is a rotating panel survey based on a nationally representative sample that gives each household in the coterminous U.S. an equal probability of being selected. Interviews are conducted throughout the month by telephone. The minimum monthly change required for significance at the 95 percent level in the Sentiment Index is 4.8 points; for the Current and Expectations Index, the minimum is 6 points.

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