What's Behind the Surprise Drop in US Consumer Sentiment?

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Bloomberg Oct 12 11:06 · 25.2k Views

Joanne Hsu, who directs the University of Michigan consumer sentiment survey, says consumers remain frustrated by the persistence of high prices, but they're benefiting from labor markets that remain relatively strong.

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00:00 University of Michigan's consumer sentiment numbers,
00:03 the
00:03 number comes in at 68.9 for the headline, down from 70.1 last month.
00:09 Current conditions at 62 seven,
00:12 down from 63 three and expectations
00:15 72 nine.
00:16 That's down from 74 four.
00:18 Joining me as always, Joanne Hsu is the director of surveys for the University of Michigan.
00:24 Good morning to you
00:26 up in Michigan.
00:27 Let me ask you, you and I talked very briefly before this
00:31 and, and your feeling is
00:33 these aren't much of A move, that this isn't a huge change or shift in sentiment.
00:38 That's correct.
00:39 It's a very small change.
00:40 It's not really a meaningful change.
00:41 You
00:42 know, especially for a preliminary reading,
00:45 we shouldn't really interpret this as a decline in sentiment.
00:48 It's really a no change.
00:50 What is
00:51 behind that?
00:51 I mean, to the extent that you can figure it out,
00:54 the small change, what's behind it?
00:56 I was looking through some of the data.
00:58 Doesn't look like people are particularly worried about their jobs or their incomes over the next year.
01:03 Yeah.
01:04 I mean, I think on the big things that impact a person's, a household's budget, you know, their income prospects and the
01:11 and the cost of living,
01:13 those two are sort of offsetting each other right now.
01:15 You know, consumers remain very, very frustrated by the persistence of high prices.
01:19 They're
01:22 consistent with the CPI print yesterday.
01:25 They're a little concerned that the slowdown in inflation might be, might be slowing down a bit.
01:30 But at the same time, they recognize that labor markets remain relatively strong
01:35 with the Fed stepping in last month with the jumbo size rate cut.
01:38 I think consumers,
01:40 they, they believe that the Fed was going to step in to prevent labor markets from deteriorating and indeed we see that in their income expectations this month.
01:48 As a Fed watcher, what really stood out to me obviously is the one year
01:53 price expectations
01:54 go up to 2.9% from 2.7%.
01:59 Is that
02:00 largely on gasoline price fears because of what's going on in the Middle East?
02:06 We're not really seeing specific and any specific references to what's going on in the Middle East.
02:12 I mean, there are certainly some folks who are concerned about gas prices and,
02:16 and,
02:17 and gas price expectations
02:19 are up a little bit.
02:21 But in, in terms of the 2.7,
02:24 sorry, the 2.4 to 2.7, you know, 2.7 is still much lower than we are seeing earlier in the year.
02:29 So it's still consistent with a continued slowdown in inflation ahead.
02:33 So nothing for the Fed to worry about in terms of
02:36 people beginning to turn
02:38 to, to
02:39 accept the idea that we're going to see higher prices.
02:43 That's,
02:44 that's right.
02:45 In fact, when we look at the long run expectations
02:48 for inflation, that ticked down from 3.1 to 3.0.
02:51 So consumers really are not, even though the short run expectations
02:55 came up a bit,
02:56 they're really not expecting inflation to come roaring back or anything like that.
03:01 What are they concerned about then?
03:04 Is it just a general on we?
03:06 No, they're concerned about the election that that's, that's pretty clear.
03:11 There are many consumers who tell us that the trajectory of the economy hinges entirely on who ends up winning the election last month, next month, not last month.
03:21 And and so for many consumers, it's, it seems pretty clear that they're reserving judgement.
03:26 You know, some consumers are are answering all these questions
03:29 under the assumption that one candidate is going to win.
03:33 It's not necessarily their preferred candidate,
03:36 but they have been leaving
03:39 these unsolicited comments that
03:42 if if the other candidate wins, all my expectations change.
03:46 That's interesting because when you look at the breakdown of
03:49 Democrats and Republicans, both
03:52 are more confident this month.
03:54 Yes, that's that's right.
03:55 So,
03:56 you know, I think there isn't much movement in terms of election expectations.
04:02 We ask a couple of questions
04:05 about who consumers believe is going to win the election and that's not really
04:09 moved much between, you know, September and October.
04:13 So we're not seeing any major shifts in election expectations and, and as a result, you know, not too many changes in economic expectations either.
04:22 Yeah,
04:23 looking at the
04:25 Democrat, Independent,
04:27 Republican expectations,
04:30 they're all higher.
04:31 Everybody seems to think that maybe we get through this election and things will be better
04:35 one way or the other.
04:36 Yeah, I mean, I, I think that broadly consumers believe that we are
04:42 on the upswing.
04:42 What we've been seeing over the past year is that
04:45 business conditions, expectations for business conditions have been improving
04:50 pretty
04:51 consistently over the last two years.
04:53 And you know, this month we're
04:57 there's just like a very, very small improvement, but really when we.
05:00 Take the Longview.
05:00 What we're seeing is, is, you know,
05:03 pretty substantial improvement in expectations for business conditions
05:07 over the past two years.
05:10 If,
05:10 if we leave politics
05:12 aside for a moment,
05:15 generally how are people feeling in the sense that while these numbers aren't
05:20 a
05:20 big move, they're still depressed from what you would see in most recoveries
05:26 and most expansions?
05:28 What, what's,
05:29 what's holding people back now?
05:33 I, I think what we should really pay more attention to is the long run trajectory of, of sentiment rather than the level.
05:39 It is absolutely true that the level of sentiment right now is below its historical average.
05:43 But we also know is that,
05:46 you know, consumers are feeling
05:48 kind of negative, more negative now than they were five years ago before the pandemic on a number of dimensions.
05:55 We see this in the psychology research that people
05:58 express much higher levels of stress now than they did before the pandemic, even on issues, non economic issues that really didn't change a whole lot between then and now.
06:07 And, you know, we also
06:09 did some research earlier in in the year
06:13 about the types of new sources that people are consulting and, you know, the proliferation
06:17 of
06:18 of sort of
06:20 click worthy stories and posts on social media
06:25 that could be contributing also to, you know,
06:28 a, a slightly more negative
06:31 base baseline type of type of feeling.
06:34 So I mean, I, I think it's too early to say whether this is going to persist.
06:38 I think the main thing to notice is that,
06:41 yes, we may be below the historical average right now, but we're 40% above where we were two years ago.
06:46 And so I think that is a sign of some recognition
06:49 of improvements in the economy, particularly in the slowdown in inflation over the last two years.
06:55 I know you look at the
06:57 news
06:58 story impacts on consumer sentiment.
07:01 I
07:01 are you basically saying people are seeing a lot more bad news
07:04 in the press these days?
07:07 They're reporting
07:08 here, seeing, hearing more bad news.
07:11 And,
07:14 and it's not just in the press.
07:15 The question that we asked about
07:17 news they've heard about the economy could be at the barbershop, could be a church, it could be on social media, it could be an any of these things.
07:23 What I can say is that we've been tracking the share of consumers who have heard negative news about inflation
07:30 and the share that reported that they heard negative news about inflation
07:34 was much higher during this most recent inflationary episode
07:38 prior to this slow down this year
07:40 relative to
07:41 the early 80s and late 70s
07:43 when
07:44 inflation was objectively much, much worse.
07:47 So, you know, I think that's
07:48 really a reflection of the fact that
07:51 sources of news are different in
07:52 the new cycle is different.
07:54 How people share information is totally different.
07:57 You know, you don't need to be face to face anymore to be sharing information with
08:00 with people in your social circle.
08:03 And you know, I don't necessarily think this is a causal,
08:06 causal relationship.
08:06 It could be that you don't feel about good about the economy, so you're going to go and search for every news story or click on every every post that
08:14 confirms your prior belief.
08:17 So I think if you have an underlying feeling that the economy is not doing great,
08:22 I think the information situation out there is reinforcing that
08:27 and they slow down these transitions and how people feel
08:31 relative to, you
08:32 know, how quickly
08:34 people sentiment might recover and an economic recovery.
08:36 In previous periods,
08:39 you mentioned that the
08:40 the number of people complaining about high prices is higher than it was in previous
08:46 cycles.
08:47 I'm wondering if it's higher than it was a few months ago or at the beginning of the year.
08:51 In other words, what are people's perceptions
08:53 of inflation going forward
08:55 and
08:57 its impact on their lives?
08:59 What have they been doing in the last couple of months?
09:02 Yeah, that's a great question.
09:03 So on the surveys of consumers, there are
09:06 at least three different places where we collect information on how
09:10 on inflation and high prices.
09:11 So one is the inflation expectations that's closely watched by the Fed
09:15 2 is what I just mentioned.
09:17 When we ask people what news have you heard?
09:19 We're tracking how many times people are
09:21 spontaneously mentioning high prices with high prices is not an answer choice.
09:25 It's just something that people spontaneously bring up.
09:27 And the third one is when we ask about their personal finances,
09:30 we ask what factors go into their personal finances, into their assessment.
09:34 And we're again tracking spontaneous mentions of high prices.
09:37 So first of all, inflation expectations, as we've discussed,
09:41 have slowed down, have softened and eased up
09:44 quite a bit over the last two years.
09:46 So that's, you know, a pretty strong signal that consumers recognize that inflation has slowed down
09:50 and that they expect it to continue slowing down.
09:52 Secondly, on the news front, the share of consumers telling us they're hearing bad news about inflation, that has also come down as well.
10:00 So you know, I mentioned
10:02 it was previously higher than it was in the previous inflationary periods in the 70s and 80s.
10:07 That's most mostly referring to 2022 and 2023 in 2024.
10:12 That's come down quite a bit.
10:13 At the same time, a lot of consumers telling us they're hearing negative news about unemployment
10:18 even through
10:20 even before we started seeing some labor market indicators soften
10:24 earlier
10:25 over the past few months.
10:26 And then finally, in terms of personal finances,
10:30 we've consistently had over over 40% of consumers
10:34 spontaneously telling us that high prices are weighing down their personal finances all year long, that that really has not changed much at all.
10:42 So in spite of the fact that consumers fully recognize that inflation has slowed,
10:47 that they recognize that the news that they're hearing around them and they're seeing around them
10:52 indicates that inflation has slowed down, they're still really, really frustrated by how persistent high prices have been.
11:00 How,
11:01 how do we see if we can see any reaction to the Fed's
11:06 larger than expected rate cut this past month?
11:10 We didn't really see much evidence of a reaction right around September 18th,
11:15 but we weren't really expecting one either.
11:17 It's, it's pretty unusual for
11:19 consumers to pay attention to,
11:22 to a policy announcement or FOMC
11:25 a a Jay Powell presser like they're, they're not paying attention to that.
11:28 That being said, they are paying attention to news around them about interest rates, interest rates that they are observing around them.
11:34 And
11:35 when we're asking about buying conditions for these, for large purchases like cars,
11:39 durable goods and homes,
11:42 the share people who are concerned about high prices for those things have all dropped this month.
11:47 So you know, I think that's all consistent with the fact that consumers have noticed that in that interest rates are falling.
11:53 And when we asked them directly about their interest rate expectations,
11:57 we have 54% of consumers telling us that they expect an
12:01 interest rates to continue falling in the year ahead.
12:04 And that's just down.
12:05 It was 54% this month, it was 55% last month.
12:08 That was an all time high since we started collecting this data.
12:12 And so that's not much of A change.
12:13 We didn't see any change in that before and after September 18th.
12:16 So,
12:17 you know, jumbo rate cut or not, their consumers are expecting inflation, not inflation, interest rates to continue slowing.
12:24 Do you notice any movement in the number of people who think it's a better time to buy a house?
12:30 People definitely
12:32 are feeling a little bit more optimistic
12:36 or favorable about home buying conditions specifically because of this drop in interest rates.
12:41 And,
12:42 and, and you know, mortgage rates
12:44 came down well in advance of the rate cut announcement.
12:48 But that being said, we are near historic lows in terms of how bad,
12:53 how it's a bad had time to buy a house.
12:55 And, and so we saw we've been seeing a modest improvement as mortgage rates have fallen,
13:02 but
13:03 we still have a majority of consumers telling us prices are excessive.
13:07 Prices are home prices are really high.
13:09 So I think it's going to take more than A50 basis point cut in interest rates
13:15 alone for consumers to feel like it's going to be a good time to buy a house.
13:20 Before I let you go, I got to ask about what's been in the news lately, and that's the Hurricanes.
13:24 Milton, probably too late for your survey, but
13:27 Helene
13:28 certainly did a lot of damage in the Southeast.
13:31 And I'm wondering if that affected A, your survey responses
13:36 and B,
13:37 people's feelings about the
13:39 overall economy.
13:41 So we didn't get too many explicit mentions of, of hurricanes.
13:44 As soon as Helene, you know, kind of
13:46 started forming
13:48 over water, we started tracking mentions of hurricanes.
13:51 And we just didn't have too many people.
13:53 We didn't have too many people mentioning that
13:56 we are sort of watching
13:59 our, you know, how,
14:00 how many of
14:01 our consumers in the Southeast are answering our survey.
14:04 And, you know, we give people several weeks to respond to the survey.
14:07 So
14:08 we'll we'll see at the end of the month.
14:10 If,
14:11 if, if we have if if the composition of our sample has been affected by that.
14:15 But explicitly, we don't have that many people mentioning the Hurricanes.
14:19 We have a lot of people mentioning the election.
14:22 So if it's on their
14:23 minds, it's not, it's not being connected to the economy.
14:28 Well, we'll see I guess at the end of the month when we get the final results and we will talk to you for the next preliminary results
14:34 when we get to November.

What's Behind the Surprise Drop in US Consumer Sentiment?

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