Consumer sentiment plunged in the early weeks of February as consumers lost faith in the Biden administration’s economic policies, inflation rose to the worst level in 40 years, and the long-term economic outlook of American households fell to its least favorable level in a decade.
The University of Michigan’s measure of consumer sentiment crashed to an initial February reading of 61.7, from January’s level of 67.2, the lowest reading since October of 2011. Economists were expecting a reading of 67, so this was a much bigger decline than anticipated. “Sentiment continued its downward descent, reaching its worst level in a decade, falling a stunning 8.2 percent from last month and 19.7 percent from last February,” said Richard Curtin, the chief economist of the consumer sentiment survey.
The component of the index that measures consumers’ views of current conditions dropped to 68.5 in February from 72 in January.
The gauge of expectations fell to 57.4 from 64.1. Cratering sentiment has been driven by weakening personal financial prospects, largely due to rising inflation, less confidence in the government’s economic policies, and the least favorable long-term economic outlook in a decade, according to Curtin. One-third of consumers spontaneously cited the impact of higher inflation on personal finances. Nearly half of all consumers expect declines in their inflation-adjusted incomes during the year ahead. Twenty-six percent of consumers expect their financial prospects to worsen, the highest level of negative sentiment in four decades. Curtin said that the decline in the sentiment gauge indicates a sustained downturn in consumer spending. “The depth of the slump, however, is subject to several caveats that have not been present in prior downturns: the impact of unspent stimulus funds, the partisan distortion of expectations, and the pandemic’s disruption of spending and work patterns,” Curtin said. Despite the Federal Reserve’s hawkish turn in recent months, near term inflation expectations climbed and longer-term expectations remained stuck at an elevated level.
The survey’s one-year inflation expectations rose to 5.0 percent, the highest since 2008, from 4.9 percent in January.
The five-to-10-year inflation outlook held steady at 3.1 percent, much higher than the two percent the Fed looks to achieve. One surprising result in the survey was that Republican consumer sentiment improved a bit in February, although it remains far more negative than Democrat sentiment. Sentiment among consumers who identify as Democrats and political independents grew more pessimistic. Poor government economic policies were cited by 51 percent of consumers, an indication of the collapse of confidence in the Biden administration.
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