As shown below, the University of Michigan Index of Consumer Sentiment hit an all-time low in April falling 10.7% from the March figure. The Index is 9% below the year ago reading. While the most recent decline was certainly impacted by the war in Iran, the chart clearly indicates that sentiment has been declining since 2018.
Every component of the index experienced material declines in April, and overall sentiment was weak across all age, income, and political affiliation cohorts. Of particular note is the increase in year-ahead inflation expectations from 3.8% in March to 4.8% in April. Moreover, longer term inflation expectations ticked up from 3.2% to 3.4%. Recall that the Federal Reserve has a 2% target. Based on how they respond to surveys, consumers are obviously pessimistic and grumpy.
Here’s the rub. Despite their gloomy outlook, consumers continue to spend. February data represents the most recent figures available. Note that year-over-year growth for that month was just over 3% which is consistent with longer-term historical experience. It has been widely reported that roughly one-half of all consumer spending is attributable to upper income individuals. So, one might posit that upper income earners have a different outlook than the rest of the population. However, as noted above, the Michigan poll finds declines in sentiment across the income spectrum.
The bottom line is that I don’t get it. Perhaps consumers are not really that gloomy and they simply use surveys as a means to blow off steam. Alternatively, they may be so pessimistic that they say “what the heck, I am going to enjoy myself because the world is going to hell anyway.” Regardless, consumer spending has propped up the economy so let’s hope it remains healthy despite the prevailing gloom.