The University of Michigan’s Consumer Sentiment index declined sharply in April, falling to 71.8 — down over 17 points in the last month. Even so, the decline was less severe than anticipated, as economists had forecast a more pronounced drop to around 68.0.
Sentiment has fallen sharply since its recent peak in February of this year, when the index hit 101 on the back of improving trade relations with China and a firming economic outlook. Over the past two months, however, the COVID-19 pandemic has caused a notable deterioration in the collective mood of consumers and their assessment of economic conditions.
The survey results paint an unambiguous picture of a rapid deterioration in sentiment that mirrors the speed and magnitude of the decline in the economy. Consumers’ assessment of current conditions have turned much more negative in the span of several weeks.
While consumers are less optimistic about their expectations for the future, the adjustment there has been less pronounced. Even before the outbreak of COVID-19 established a foothold in the U.S., consumers expressed a more skeptical view about the future path for the economy, even with a strongly positive assessment of current conditions.
While health concerns related to the virus outbreak have created a sense of fear and anxiety for many, the aggressive measures taken to attempt to contain the virus also play a significant role. With stay-at-home orders in place to varying degrees across much of the country, large portions of the economy came to an abrupt halt. Unemployment has risen rapidly, with over 20 million individuals filing for unemployment in the past month.
That deterioration in employment has weighed heavily on consumer sentiment, hitting household finances hard. Given the lingering questions about the path ahead, the impact on consumer behaviors over an extended period, and the scars that this downturn will create, a rapid return to the pre-crisis normal is highly unlikely.
The healing process will take time, just as it always does coming out of a recession. Still, the economy was in reasonably good shape coming into the year. The fact that this downturn was caused by an exogenous shock and is not the byproduct of a needed purge in some aspect of the economy should be a positive at the margins.
The full impact of the pandemic on the economy remains to be seen, but it will undoubtedly weigh heavily on growth for the first half of the year. However, the unprecedented amount of economic stimulus being provided should help to blunt the blow. While stimulus can only go so far to promote growth in an economy that is still largely in forced lockdown, it should help to limit the damage caused by the slowdown in economic activity and put the economy in a better position to rebound once the virus issue has been contained.
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