Consumer Sentiment Fell Slightly in Early November but Remains at a High Level

The preliminary November results from the University of Michigan Surveys of Consumer Sentiment show overall consumer sentiment fell slightly from the final October result. Consumer sentiment decreased to 98.3 in early November, down from 98.6 in October, a 0.3 percent decline. From a year ago, the index is off 0.2 percent. Despite the slight decline, sentiment is holding at very favorable levels.

The two sub-indexes had opposing performances in early November. First, the current-economic-conditions index rose to 113.2 from 113.1 in October. That is a 0.1 percent gain for the first part of the month but a 0.3 percent decrease from November 2017.

The second sub-index — that of consumer expectations, one of the AIER leading indicators — fell 0.7 percent for the month and showed a 0.2 percent decline from the prior year (see chart). According to the report:

The stability of consumer sentiment at high levels acts to mask some important underlying shifts. Income expectations have improved and consumers anticipate continued robust growth in employment, but consumers also anticipate rising inflation and higher interest rates. While these positive and negative changes act to offset each other in the aggregate, younger consumers have benefited most from more positive income trends and older consumers are more likely to complain about the erosion of their living standards due to rising prices; rising interest rates weigh heavily on younger consumers who are more likely to borrow, and older consumers are more likely to benefit from higher returns on their savings.

Consumer sentiment remains at broadly favorable levels, supported by a robust labor market, income gains, and record-high net worth. However, the rising pace of consumer price increases and rising interest rates are starting to impact attitudes. The crucial point will be whether consumers restrain spending in the face of accelerating price increases and rising interest rates or continue to spend, potentially with the help of increasing debt, thereby perpetuating the accelerating price increases.