The University of Michigan's Consumer Sentiment Index fell to 46.3 in October, down from 48.1 in September, moving closer to its lowest reading ever as rising living costs and borrowing expenses squeezed American households. Economists polled by Reuters had forecast 47.8. They got it wrong.
CNN described the figure as a preliminary reading. If it holds in the final data due later this month, it would mark the second-lowest level on record. The survey dates back to 1952, a span of 74 years. CNN said Americans' feelings are now worse than during the 1970s oil crisis, 9/11, the Great Recession, the Covid-19 pandemic and the inflation surge that followed. Five of the index's lowest readings have come within the past six months. The record came in May.
What Households Are Telling Pollsters
The survey's gauge of current economic conditions dropped to an all-time low of 44.7, from 50.9 in September. Reuters put the decline at 12.2%. Expectations improved only modestly, while high prices and borrowing costs sent buying conditions for durable goods plunging.
The pain wasn't evenly spread. Sentiment fell sharply among lower-income consumers, people with smaller stock portfolios and independents. It rose among Democrats and Republicans, but stayed well below January's level.
"Consumers across the political spectrum are frustrated with rising prices and a sense of treading water financially," said Jim Baird, chief investment officer at Plante Moran Financial Advisors. Joanne Hsu, director of the university's Surveys of Consumers, said frustration over cost of living continues to mount. Consumers across the political spectrum believe the economy's trajectory has weakened since the start of the year.
Energy Prices, Inflation and the Fed
CNN reported that the US-Israeli war with Iran has pushed energy prices up. Gas prices have climbed in recent months, too. Inflation continues to run above normal. Borrowing has gotten pricier after the Federal Reserve raised interest rates in September for the first time in three years.
Reuters said the central bank lifted its overnight benchmark rate by 25 basis points to a range of 3.75%-4.00% and flagged further increases in the months ahead. The odds of another hike this month faded after September payroll gains underwhelmed and inflation readings for July and August came in cooler than expected. Economists expect the Fed to move again in December.
Consumers' one-year inflation expectations rose to 4.7% from 4.6% in September, up from 3.4% in February before the war with Iran began. Five-year expectations ticked up to 3.5% from 3.4%. The Fed watches these numbers closely. CNN noted that when people expect prices to keep climbing, they may spend sooner and demand higher wages. Businesses may raise prices to match, feeding the very inflation households fear.
A K-Shaped Economy Leaning on Stocks
Reuters described an economy resembling a K: higher-income households, helped partly by strong stock-market performance, keep spending, while middle- and lower-income households face strained budgets. A separate University of Michigan report found just under a third of consumers expect to spend as usual on items that have seen large price increases. Some 54% said they'd cut back, and about 16% said they'd stop buying altogether.
James Knightley, chief international economist at ING, spelled out the dependency. "So, as long as equity markets hold up, spending can keep going," he said, adding that he hopes this buys time for an improvement in the energy situation. "But if we were to experience a stock market correction, then the situation would change quickly."
He cited Federal Reserve data showing the top 20% of households, with annual income of $155,000 or more, hold more than 70% of America's wealth and account for 40% of all spending. Knightley also pointed to the buying-conditions questions: 73% think it's a bad time to buy a household appliance, 78% a vehicle and 87% a home. "These are all key drivers of economic activity," he said.
Political Fallout Ahead of November 3
The numbers arrive weeks before the November 3 midterm elections, which will decide control of Congress. CNN reported that September's survey showed worsening opinions of the government's economic policy, with a notable decline among Republicans, according to Hsu. In September, 35% said the government was doing a good job on the economy, down from 62% in March.
Reuters reported that President Donald Trump's approval rating sits at the lowest of his political career amid discontent over his handling of the economy. Knightley said the weak reading "obviously doesn't particularly bode well for the Republicans as we rapidly approach the midterm elections." Baird said the strain may not show up in headline GDP data, but "it's likely to be very apparent as voters cast their ballots in the coming weeks."
The September Consumer Price Index is due the following Wednesday. Economists expect annual inflation to have risen to 3.6%, a four-month high.
Why This Matters:
The sentiment data points to a spending base narrower than headline figures suggest. The top 20% of households drive 40% of spending, and their willingness to spend depends on equity markets. A stock correction could expose how thin the cushion is. Meanwhile, the Fed is trying to cool prices by raising rates that already weigh on durable-goods purchases, and economists expect a December hike. Energy costs tied to the Iran war complicate that effort, since they push inflation up in ways rate policy can't easily fix. For policymakers, the lesson from these numbers is plain: households judge the economy by what things cost, and the political bill for persistent inflation comes due at the ballot box.