WSJ US BusinessConsumers Feel Worse Now Than They Did During Covid Lockdowns

September 4, 20220
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The University of Michigan survey of consumer sentiment measures how U.S. consumers feel about their personal finances, business conditions and buying conditions. Recent surveys have shown that consumers have rarely felt more downbeat about all of these measures.

In the past, when consumer sentiment was as depressed as it is today, stocks were in a bear market, unemployment was higher than average or prices were rising faster than usual.

This year, inflation has been near four-decade highs and a main driver of consumer pessimism. The S&P 500 is in a bear market, but up 7% from its 2022 low. Uncharacteristically of periods with low sentiment, unemployment is historically low.

1980 recession

2007-09 recession

April-June 2020

Trend line

Consumer sentiment fell to a record low earlier this year. It has risen in each of the past two monthly readings but remains near the low points of recessions in 1980 and 2007-09.

The recent plunge in sentiment has coincided with a downturn in stocks, as shown on the x-axis. But the market turbulence this year hasn’t approached the depths of the crash during the 2008 financial crisis.

Since the late 1970s, consumers’ outlook has tended to rise and fall with stock returns. That trend has held this year and in 1980, although both years had lower sentiment readings than in other periods with worse returns.

Historically, sentiment also tracks the labor market. Sentiment tends to decline when unemployment rises. This year has been an exception to that pattern. Consumers are downbeat even though jobs are plentiful.

Even early in the Covid-19 pandemic, when unemployment was at a record 14.7%, consumers were more optimistic than they have been in 2022.

The bleak outlook this year reflects the impact of inflation, which has been at its highest levels since the early 1980s.

The downturn in sentiment hasn’t been limited to the U.S.

Consumer sentiment has declined in many of the countries tracked by the Organization for Economic Cooperation and Development. The mood among consumers is particularly depressed in Europe. The U.K., Netherlands and Sweden have experienced larger-than-average declines in consumer sentiment for 10 straight months.

Months with larger-than-average declines in consumer sentiment from three months earlier

March 2020

World Health Organization

declares global Covid-19 pandemic

March 2022

Federal Reserve begins

raising interest rate

Netherlands

Other developed countries

New Zealand

South Korea

Emerging markets

March 2020

World Health Organization

declares global Covid-19 pandemic

March 2022

Federal Reserve begins

raising interest rate

Netherlands

Other developed countries

New Zealand

South Korea

Emerging markets

March 2020

World Health Organization

declares global Covid-19 pandemic

March 2022

Fed begins

raising rate

Netherlands

Other developed countries

New Zealand

South Korea

Emerging markets

March 2020

WHO declares global

Covid-19 pandemic

March 2022

Fed begins

raising rate

Netherlands

Other developed countries

New Zealand

South Korea

Emerging markets

Jonathan Millar, a senior economist at Barclays Investment Bank, recently said that “the fundamentals fall somewhat short of explaining the worsening of sentiment since January.”

Michael Gapen, head of U.S. economics at Bank of America, argues that “a multitude of factors influence sentiment, these can be economic or noneconomic factors.”

One of these noneconomic factors could be how widespread news coverage of inflation has been. Data from July show that 37% of consumers surveyed by the University of Michigan reported hearing about higher prices as a cause of worsening business conditions. In 1980, with inflation running higher than today, only 21% of consumers reported hearing that inflation was hurting the economy.

Consumers hearing about higher prices as a reason for worsening business conditions

In 1979, 21% of consumers heard news that inflation was hurting business conditions. Inflation peaked the following year at more than 14%.

In July, inflation was below 9% but 37% of consumers heard about higher prices in the news.

In 1979, 21% of consumers heard news that inflation was hurting business conditions. Inflation peaked the following year at more than 14%.

In July, inflation was below 9% but 37% of consumers heard about higher prices in the news.

In a widely cited working paper from 2004, Federal Reserve economists wrote, “We find that there are periods when reporting on the economy has not been consistent with actual economic events…as a consequence, there are times during which consumer sentiment is driven away from what economic fundamentals would suggest.”

The risk that low sentiment poses to the economy is that if consumers are gloomy, regardless of the reason, they are less likely to spend.

In June, 65% of consumers—the largest on record—said it was a bad time to buy large household items, such as furniture, a TV or kitchen appliances. The main reason they cited was high prices.

The Federal Open Market Committee, the policy-making arm of the Federal Reserve, has repeatedly mentioned weaker consumer sentiment as a risk to the U.S. economic outlook.

The minutes from the FOMC’s most recent meeting said that “consumer sentiment had deteriorated, and households were reportedly becoming more cautious in their expenditure decisions.”

A souring mood for consumers is a concerning sign because household spending accounts for about 70% of U.S. economic output.

Joanne Hsu, director of the Surveys of Consumers and a research associate professor at the Institute for Social Research at the University of Michigan, said of the latest survey reading that consumers “signaled strong concerns that inflation will continue to erode their incomes.” She pointed out that while consumer spending has been robust, the deterioration of sentiment could lead Americans to “cut back on spending and thereby slow down economic growth.”

Not all surveys show consumers are so downbeat. The confidence survey conducted by the Conference Board indicates that consumers are less confident than before the pandemic but still relatively upbeat in historical context.

The different findings from the two surveys could be a result of their respective emphasis: The Conference Board focuses more on the economy and labor-market conditions, which have been strong, while the Michigan survey focuses more on personal financial prospects, which have been negatively affected by inflation.

Write to Aziz Sunderji at aziz.sunderji@wsj.com and Peter Santilli at peter.santilli@wsj.com

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