The final November results from the University of Michigan consumer survey show that overall consumer sentiment has declined over the month, holding at historic lows (see chart one). The composite consumer sentiment index fell to 56.8 in November from 59.9 in October. The index hit a record low of 50.0 in June, down from 101.0 in February 2020 at the start of the lockdown recession. The decline in November was 3.1 points or 5.2 percent. The composite index remains at the level of previous recession levels.
The index of current economic conditions fell to 58.8 from 65.6 in October (see first chart). This is 6.8 points or 10.4 percent less for the month. This component is just five points above the June low of 53.8 and remains in line with previous recessions.
The second component, consumer expectations, one of AIER’s leading indicators, fell 0.6 points, or 1.1%, to 55.6 over the month. This component index is 8.3 points above the July 2022 low of 47.3 and remains in line with previous recession levels (see first chart). According to the report, “Consumer sentiment fell 5% from October, offsetting roughly one-third of the gains recorded since June’s all-time low.” The report adds: “Along with the continued impact of inflation, consumer sentiment has also deteriorated due to rising borrowing costs, declining asset values and weakening labor market expectations. Durable goods purchase conditions, which improved markedly last month, declined sharply in November, falling 19% to their September levels due to high interest rates and continued high prices.” The report goes on to say, “Long-term business conditions deteriorated by a more modest 6%, while short-term business conditions and personal finances were largely unchanged.”
Annual inflation expectations fell to 4.9 percent in November. The result remains below the parallel 5.4% in March and April, but above 4.7% in September (see second chart).
Five-year inflationary expectations rose, reaching 3.0 percent in November. This result is within a 25-year range of 2.2% to 3.5% (see second chart). The report states: “Long-term inflation expectations, currently at 3.0%, have remained in a narrow (albeit elevated) range of 2.9% to 3.1% for 15 of the past 16 months.” In addition, “uncertainty around these expectations remained elevated, indicating that the overall stability of these expectations may not necessarily last.”
Consumer pessimism reflects a significant list of concerns, including inflation, rising interest rates, falling asset prices and rising labor market pessimism. Overall, economic risks remain elevated due to the impact of inflation, the Fed’s aggressive tightening cycle, and the ongoing fallout from the Russian invasion of Ukraine. The economic outlook remains highly uncertain. The caution is justified.