– April 28, 2020

The Consumer Confidence Index from The Conference Board fell sharply again in April, dropping 31.9 points to 86.9, the lowest level since June 2014. The index is constructed so that it equals 100 in 1985 (see top chart).

The drop was driven by the present situation component. The present-situation component fell to 76.4 from 166.7, the lowest since December 2013 (see top chart again). The April drop of 90 points is the largest on record. The expectations component gained 7 points to 93.8 from 86.8 in the prior month.

According to The Conference Board report, “Consumer confidence weakened significantly in April, driven by a severe deterioration in current conditions. The 90-point drop in the Present Situation Index, the largest on record, reflects the sharp contraction in economic activity and surge in unemployment claims brought about by the COVID-19 crisis. Consumers’ short-term expectations for the economy and labor market improved, likely prompted by the possibility that stay-at-home restrictions will loosen soon, along with a re-opening of the economy. However, consumers were less optimistic about their financial prospects and this could have repercussions for spending as the recovery takes hold. The uncertainty of the economic effects of COVID-19 will likely cause expectations to fluctuate in the months ahead.”

The Conference Board results are mostly in line with the final results from the University of Michigan. The final April results from the University of Michigan Surveys of Consumers show overall consumer sentiment fell sharply from the final March result, registering the second double-digit percentage decline in a row. Consumer sentiment decreased to 71.8 in April, down from 89.1 in March, a 19.4 percent decline (see bottom chart). From a year ago, the index is down 26.1 percent. March and April combined show a two-month drop of 29.2 Index-points.

Both sub-indexes in the University of Michigan survey posted sharp declines in April. First, the current-economic-conditions index dropped to 74.3 from 103.7 in March (see bottom chart). That is a 29.4 point or 28.4 percent decline following a 9.7 percent fall in March. From a year ago, the current conditions index is down 33.8 percent.

The second sub-index — that of consumer expectations, one of the AIER leading indicators — sank a much-less-severe 9.6 points or 12.0 percent for the month to a reading of 70.1, and is 19.8 percent below the prior year. While the 12.0-point decline puts the index at the lowest level since March 2014, the less severe drop in the expectations index relative to the current conditions index perhaps indicates an underlying optimism about the future.

According to the University of Michigan report, “While the decline in both indices indicates an ongoing recession, the gap reflects the anticipated cyclical nature of the coronavirus. In the weeks ahead, as several states reopen their economies, more information will reach consumers about how reopening could cause a resurgence in coronavirus infections. Consumers’ reactions to relaxing restrictions will be critical, either putting further pressure on states to reopen their economies, or exerting added pressure to extend the restrictions even if it has negative consequences for economic prospects. The risks associated with these decisions are not equally balanced, with an incorrect decision to reopen having serious repercussions. The necessity to reimpose restrictions could cause a deeper and more lasting pessimism across all consumers, even those in states that did not relax their restrictions.”

The shuttering of many businesses, the sharp rise in layoffs over the last five weeks, and extensive distortions to economic activity have resulted in a record-shattering plunge in consumer attitudes. Stimulus efforts may help in the short term (though early indications are that there are major failures in government systems to actually distribute stimulus funds) but ultimately, beating COVID-19 and getting life back to normal is the only way to sustainably boost the economy and consumer sentiment. Whether that is a quickly achievable outcome or not is highly questionable. Expect extraordinarily weak economic reports over the next several months.

Robert Hughes

Bob Hughes

Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.

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