The University of Michigan’s Consumer Sentiment Index fell to 46.3 in October from 48.1 in September. Rising living costs and borrowing expenses weighed on households, while higher-income consumers remained more likely to keep spending. Economists polled by Reuters had forecast a reading of 47.8. CNN reported that if the preliminary reading holds in the final data due later this month, it will be the second-lowest on record.
The survey’s measure of current economic conditions dropped to an all-time low of 44.7 from 50.9 in September, a 12.2% decline, Reuters reported. Expectations improved modestly. But high prices and borrowing costs sent buying conditions for durable goods plunging.
Who Can Still Spend
Lower-income consumers and people with smaller stock portfolios took the hardest hit, with sentiment declining sharply. Sentiment also fell among respondents identifying as independents. It rose among Democrats and Republicans, but remained considerably below January’s level.
Higher-income households have kept consumer spending supported, Reuters reported, while middle- and lower-income households face strained budgets. The divide reflects an economy described as K-shaped: strong stock-market performance has partly benefited higher-income households, while those with less income face pressure on household 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. “But if we were to see a stock market correction at a time when you've still got stress elsewhere, that could really undermine the US growth story.”
A separate University of Michigan report found just under a third of consumers expected to spend as usual over the coming year on items that had experienced large price increases. Fifty-four percent said they would cut back, and about 16% said they would stop buying. Higher-income consumers were more likely than lower-income consumers to maintain spending.
Prices, War and Interest Rates
The US-Israeli war with Iran has raised energy prices and fanned inflation. Gas prices have climbed in recent months as a result of the war, CNN reported. Consumers’ expectations for inflation over the next year rose to 4.7% from 4.6% in September. They had reached 3.4% in February before the war with Iran pushed gas prices higher. Expectations for inflation over the next five years increased to 3.5% from 3.4% in September.
The Federal Reserve raised its overnight benchmark interest rate by 25 basis points in September, setting it at a range of 3.75% to 4.00%, Reuters reported. The central bank flagged further increases in borrowing costs in the months ahead. Underwhelming September payroll gains and cooler-than-expected inflation readings for July and August diminished the odds of another rate increase this month; economists expect the Fed to raise rates in December.
The survey found that 73% of consumers thought it was a bad time to buy a household appliance, 78% said it was a bad time to buy a vehicle and 87% said it was a bad time to buy a home, Knightley said. “These are all key drivers of economic activity.”
Economic Discontent Before the Vote
“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. “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.”
Joanne Hsu, director of the university’s Surveys of Consumers, said: “Frustration over cost-of-living continues to mount, as consumers across the political spectrum believe that the trajectory of the economy has weakened since the beginning of the year.”
CNN reported that September’s survey showed worsening opinions about the government’s economic policy. In September, 35% said the government was doing a good job with the economy, compared with 62% in March. The latest official inflation reading, the Consumer Price Index for September, was due the following Wednesday; economists expected annual inflation to reach 3.6%, a four-month high.
The November 3 midterm elections will determine control of Congress. Reuters reported that President Donald Trump’s approval rating was 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.”