Consumer Are Uncertain of the Future

Consumer Are Uncertain of the Future

May 29, 20244 min read

Last week the Institute for Social Research (ISR) of the University of Michigan released their monthly report on consumer sentiment.  The monthly report and its index are based on the responses from US households by phone survey conducted by the University of Michigan's Consumer Survey Center on their assessment of current conditions and expectations of future conditions. Preliminary estimates for a month are released at mid-month and are based on about 420 respondents. Final estimates are released near the end of the month and are based on about 600 respondents.

For the May report, the mid-month results indicate a preliminary consumer sentiment index of 67.4 that was revised up to 69.1 for the final May reading.  May is below April's final reading of 77.2.

Consumer sentiment plummeted from a 2021 summer peak of enthusiasm to a historic low by the summer of 2022.  The rising hope that America would recover from the worldwide coronavirus, followed by massive supply chain disruptions, was all but lost when the Federal Reserve began raising interest rates in March 2022.  Apparently, that was the "third shoe to fall" that dissipated the high readings of consumer sentiment to new lows as major media headlines of pending recession and housing crisis due to the rapid rise of inflation and interest rates.  Thankfully, the Federal Reserve rate hike campaign did reverse the robust rising trend of inflation and avoided putting the nation in a recession.

Joanne Hsu, PhD, Director of ISR University of Michigan, provided this commentary on May's reading:

"Consumer sentiment fell back about 10% this May following three consecutive months of very little change. This 8.1 index-point decrease is statistically significant and brings sentiment to its lowest reading in about five months. The year-ahead outlook for business conditions saw a particularly notable decline, while views about personal finances were little changed. Consumers expressed particular concern over labor markets; they expect unemployment rates to rise and income growth to slow. The prospect of continued high interest rates also weighed down consumer views. These deteriorating expectations suggest that multiple factors pose downside risks for consumer spending. Still, sentiment remains almost 20% above a year ago and about 40% above the all-time historic low in June 2022, reflecting how much consumer views have improved as inflation eased."

I thought her comments were spot on with many conversations we have with clients, colleagues, and friends.  It seemed that most people were relieved and surprised with the positive returns of their Up Capital Management investment accounts by end of year 2023.  Even though relieved to see their accounts appreciating, their outlook less has not improved for 2024 especially as we approach another contentious presidential election.

It is also interesting to learn for the first time since the Institute for Social Research (ISR) of the University of Michigan began issuing this monthly report in 1946, and they are in the process of changing how they obtain responses to their survey.

This month, Ms. Hsu announced the following:

"In light of the increasing effort required to reach a randomly selected household over the telephone, the Surveys of Consumers research team began initial experiments with web data collection in 2010. Over time, the phone survey landscape has presented heightened challenges, making it increasingly impractical for a high-frequency survey in which timeliness is critical. Currently, one single completed interview requires more than 90 separate phone number dials and over three hours of interviewer time. Also, while there has been no effect on survey estimates thus far, contact with respondents has grown increasingly unpredictable. Navigating these hurdles requires strategic tradeoffs, and the Surveys of Consumers research team has continuously adapted to maintain data quality, representativeness, and precision of estimates. Even in the absence of resource constraints, few tools remain to meet future challenges. At the same time, the survey and communication technology environments have evolved as well, which enabled us to begin an experimental monthly data collection of web interviews in 2017. "

Although the new process will be more efficient, Ms. Hsu is hopeful the transition to the new data collection process will not change the integrity and accuracy of their census and monthly index readings.

What Does This Mean to Me?

Consumer spending represents 66% of the US commerce in America and is a key driver of the US economy.  As consumer sentiment wanes, so does spending as consumers become more conservative with their budgets.  The same decline in the Institute for Social Research (ISR) of the University of Michigan readings began last summer, raising concerns about holiday retail sales.  As it turns out, 2023 holiday sales peaked at all-time highs even as sentiment reading continued to decline for the fifth consecutive month going into December.   The takeaway is that the Institute for Social Research (ISR) of the University of Michigan survey provides insight, but possibly, the limited household selection is becoming less accurate in representing most of the population.

We maintain a favorable view of the US economy and stock market, as referenced in last week's issue titled "Stock Market Rolls On".

Give us a call or send us an email to schedule a no-obligation 15-minute call to discuss your questions and how we can assist you and your family in achieving your goals.

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