By the numbers
- The University of Michigan Consumer Sentiment Index dimmed modestly in early October, slipping from 70.1 to 68.9.
- Economists had forecasted a modest firming, targeting a reading of 70.8 in the preliminary monthly survey.
- The index reached a multiyear peak at 79.4 in March but has since slipped meaningfully. Nonetheless, the index remains well ahead of its level a year ago, reflecting a sharp improvement in expectations in the inflation outlook, continued economic momentum, and a growing sense that the economy may dodge a recession in the near term.
A bifurcated view
- The consumer mood has ebbed over the past six months but remains much more optimistic than was the case a year ago.
- Underlying the improvement in sentiment is a much more mixed assessment of the two key components.
- Over the past year, consumers have become increasingly optimistic about the future direction of the economy, perhaps not surprising given improvement in the primary sources of anxiety (surging prices and growing recession risk) that had cast a long shadow and taken a toll on household finances.
- Conversely, the underlying assessment of current economic conditions has weakened, likely due to a range of factors.
- The three pillars that fueled strong consumer spending in recent years are all showing signs of fatigue. Wage growth has rolled over as the pace of hiring has ebbed. The large stockpile of pandemic-era cash has been largely exhausted. Consumer credit outstanding has soared, leaving less room for many households to continue to borrow to fuel spending.
- Further, what’s shaping up to be a very close November election creates an additional source of uncertainty about which candidate will win the presidency, who will control Congress, and — perhaps most importantly — the direction of policy as a result.
Looking ahead
- Consumers have found ways to continue to spend, despite the relative softening in all three pillars that have supported that spending over the past few years. The slippage in sentiment over the past month isn’t statistically significant, effectively keeping the door open to further growth in household spending
- With the Fed now committed to gradually taking its foot off the monetary brake through measured interest rate cuts, one source of uncertainty should be alleviated.
- Although voters are sharply divided and neither candidate is likely to be able to easily bring the country together after the election, its outcome will provide further clarity around the direction of policy over the next few years.
The bottom line?
- The modest decline in sentiment in early October wasn’t statistically significant and doesn’t reflect a meaningful change in the underlying mood of consumers.
- Household spending has been the key to the economy maintaining its positive momentum in the past year, despite slower job creation and weaker wage growth. The go-go days for the job market are over, but labor conditions remain reasonably positive.
- Consumers generally have fewer — and less robust — sources to fuel spending than they did a few years ago, but there still appears to be ample juice to support further growth in consumption in the months ahead.
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