The final March results from the University of Michigan Surveys of Consumers show overall consumer sentiment fell again, hitting the lowest level since August 2011 (see top of first chart). The composite consumer sentiment decreased to 59.4 in March, down from 62.8 in February, a drop of 5.4 percent. The index is now down 41.6 points from the February 2020 peak.
The current-economic-conditions index fell to 67.2 from 68.2 in February (see the middle of the first chart). That is a 1-point decrease for the month and leaves the index with a 47.6-point drop since February 2020.
The second sub-index — that of consumer expectations, one of the AIER leading indicators — sank 5.1 points for the month, dropping to 54.3 (see bottom of first chart). The index is off 37.8 points since February 2020.
All three indexes remain below the lows seen in four of the last six recessions (see first chart).
According to the report, “Consumer Sentiment remained largely unchanged in late March at the same diminished level recorded at mid month. Inflation has been the primary cause of rising pessimism, with an expected year-ahead inflation rate at 5.4%, the highest since November 1981. Inflation was mentioned throughout the survey, whether the questions referred to personal finances, prospects for the economy, or assessments of buying conditions.”
The one-year expectations has spiked above 3.5 percent several times since 2005 only to fall back (see second chart). The five-year inflation expectations remained unchanged at 3.0 percent in March. That result remains well within the 25-year range of 2.2 percent to 3.5 percent (see second chart).
The report states, “Confidence that economic policies will resolve the problem is essential. Unfortunately, half of all consumers unfavorably assessed current policies, more than three times the 16% who rated them favorably. Making the situation even more difficult, policy makers need to take account of two unusual sources of economic uncertainty, one rather minor (the new covid variant), and a major source of continued economic disruption (the Russian invasion of Ukraine).”
One positive note in the survey was continued favorable views of the labor market. According to the report, “The sole area of the economy about which consumers were still optimistic was the strong job market. Consumers anticipated in March that during the year ahead it was more likely that the unemployment rate would post further declines than increases (30% versus 24%).” The substantial declines in consumer sentiment reflect the impact of higher consumer prices. The surge in prices for many consumer goods and services is largely a function of shortages of materials, a tight labor market, and logistical issues that prevent supply from meeting demand, and has been compounded by surging energy prices as a result of the Russian invasion of Ukraine. Furthermore, the newly initiated Fed tightening cycle raises the risk of a policy mistake and adds to the extreme level of risk and uncertainty to the overall economic outlook.