The University of Michigan’s Consumer Sentiment Index fell to 46.3 in October, down from 48.1 in September and nearing a record low. Rising living costs and borrowing expenses weighed on households. Economists polled by Reuters had forecast 47.8. The reading points to mounting financial strain: lower-income consumers and people with smaller stock portfolios reported sharper declines in sentiment.
Household costs deepen
The survey’s measure of current economic conditions dropped to an all-time low of 44.7 from 50.9 in September. Reuters reported a 12.2% decline from the previous month. Expectations improved modestly, but high prices and borrowing costs sent consumers’ views of buying conditions for durable goods plunging.
Five of the index’s lowest readings came within the past six months. The record came in May. CNN reported that, if the preliminary October reading holds in the final data due later this month, it’ll be the second-lowest level on record. The survey dates back to 1952. CNN said Americans’ reported feelings were worse than during the 1970s oil crisis, 9/11, the Great Recession, the Covid-19 pandemic and the inflation surge afterward.
“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.” Sentiment fell sharply among independents, while it rose among Democrats and Republicans. It remained considerably below January’s level.
War costs and interest rates
The US-Israeli war with Iran has pushed energy and gas prices higher in recent months, CNN reported. Consumers’ expectations for inflation over the next year rose to 4.7% from 4.6% in September, after reaching 3.4% in February before the war started. 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, to a range of 3.75%-4.00%, and flagged further increases in borrowing costs in the months ahead, Reuters reported. It marked the first rate increase in three years. The odds of another hike this month diminished after September payroll gains underwhelmed and inflation readings for July and August came in cooler than expected. Economists expect the Fed to raise rates in December.
The Federal Reserve closely tracks consumers’ expectations of future price increases. CNN reported that people expecting prices to rise might spend more immediately and seek higher wages, while businesses might raise prices to accommodate greater demand and wages, adding to inflation.
Uneven spending, approaching elections
Consumer spending has remained supported by higher-income households even as sentiment weakened, Reuters reported, describing an economy resembling a K-shape. Strong stock-market performance has partly benefited higher-income households, while middle- and lower-income households face strained budgets.
A separate University of Michigan report found that 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’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 more than 70% of American wealth is held by the top 20% of households, those with annual income of $155,000 or more, and that they account for 40% of all spending, citing Federal Reserve data. He said 73% considered it 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 survey findings come ahead of the November 3 midterm elections, which will determine control of Congress. Reuters reported that President Donald Trump’s approval rating stood 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.” In September, 35% said the government was doing a good job with the economy, compared with 62% in March.