The University of Michigan’s Consumer Sentiment Index fell to 46.3 in October, as rising living costs and borrowing expenses weighed on households. The Federal Reserve raised its benchmark interest rate in September and flagged further borrowing-cost increases ahead. Households with the least room in their budgets report the sharpest strain.
“Frustration over cost-of-living continues to mount,” said Joanne Hsu, director of the university’s Surveys of Consumers. Consumers across the political spectrum, she added, believe “that the trajectory of the economy has weakened since the beginning of the year.”
The October reading fell from 48.1 in September, nearing a record low. Economists polled by Reuters had forecast 47.8. CNN reported the figure as preliminary; if it holds in the final data due later this month, it would mark the second-lowest reading on record. Five of the index’s lowest readings came within the past six months. The record was set in May.
Who Pays for the Squeeze
The survey’s measure of current economic conditions dropped to an all-time low of 44.7, down from 50.9 in September. Reuters reported a 12.2% decline from the previous month. Expectations improved modestly, but buying conditions for durable goods plunged as prices and borrowing costs rose.
Sentiment fell sharply among lower-income consumers, people with smaller stock portfolios and respondents identifying as independents. It rose among Democrats and Republicans, but remained considerably below January’s level. The split tracks an economy Reuters described as K-shaped: higher-income households have partly benefited from strong stock-market performance, while middle- and lower-income households face strained budgets.
Just under a third of consumers expected to spend as usual over the coming year on items that had seen large price increases. Fifty-four percent said they’d cut back, and about 16% said they’d stop buying. Higher-income consumers were more likely than lower-income consumers to maintain spending.
James Knightley, chief international economist at ING, said the top 20% of households, with annual income of $155,000 or more, hold more than 70% of wealth in America and account for 40% of all spending, citing Federal Reserve data. “If the stock markets keep moving along quite nicely, we can keep these trends in play,” he said. A market correction, he warned, could undermine growth while stress remains elsewhere.
Consumers’ views of major purchases show how far that stress reaches. Knightley said 73% thought it was a bad time to buy a household appliance, 78% a bad time to buy a vehicle, and 87% a bad time to buy a home.
The Cost of Policy and the Ballot Box
The US-Israeli war with Iran has raised energy prices and fanned inflation, CNN reported. Gas prices have climbed in recent months because of the war. Inflation remained above normal, while borrowing grew more expensive after the Federal Reserve raised its overnight benchmark rate by 25 basis points in September, to a range of 3.75%-4.00%.
The odds of another rate hike this month diminished after underwhelming September payroll gains and cooler-than-expected inflation readings for July and August. Economists expect the Fed to raise rates in December. Consumers’ expectations for inflation over the next year rose to 4.7% from 4.6% in September; expectations for the next five years increased to 3.5% from 3.4%. The Federal Reserve closely tracks those expectations.
The November 3 midterm elections will determine control of Congress. President Donald Trump’s approval rating stood at the lowest point of his political career amid discontent over his handling of the economy. “It may not be readily apparent in headline GDP data, but it’s likely to be very apparent as voters cast their ballots in the coming weeks,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors.
September’s survey also showed worsening opinions of the government’s economic policy. Thirty-five percent said the government was doing a good job with the economy, compared with 62% in March. The latest official inflation reading, the September Consumer Price Index, was due the following Wednesday; economists expected annual inflation to have risen to 3.6%, a four-month high. The polling records frustration. The bills, and the decisions shaping them, remain.