The University of Michigan’s Consumer Sentiment Index was little changed from its mid-month reading, coming in at 76.9, broadly in line with expectations. The November result indicated some softening in the collective consumer mood since October, when the index reached a post-recessionary high of 81.8. Consumers indicated a slightly better view of economic conditions, but a dimmer outlook for the months ahead.
Many gauges of the economy indicate a sharp slowdown in the pace of growth, but an economy that continues to expand at an above-trend pace. It’s not surprising to see a post-recessionary economy slow after that initial strong burst off the bottom.
Even so, there are growing concerns that the economy will slow even further in the coming months. The rapid resurgence in COVID-19 across the country has created a renewed sense of anxiety for many Americans, and the recent announcement of a variety of restrictions aimed at slowing the spread of the virus are likely to not only weigh on confidence, but also create a significant headwind to the economic recovery.
The growing threat is that growth turns negative for a brief period — a risk that would be exacerbated by an expansion of lockdowns and other restrictions or by the failure of Washington policymakers to deliver a much-needed fiscal stimulus bill.
Conversely, developments on the vaccine front in recent weeks have been much better than anticipated and should, in time, provide a very significant boost to sentiment. The reported 90+% effectiveness of multiple vaccines is a very promising sign, and the potential for availability in the first half of 2021 suggests a very bright light at the end of the tunnel.
Also underlying the moderate decline in optimism this month was the outcome of the election and a meaningful reassessment of consumer sentiment that broke along political lines. Unsurprisingly, self-identified Democrats turned more optimistic in their outlook, while Republicans took a dimmer view.
The greatest near-term risk to the economy is without question the impact of the COVID-19 pandemic, the policies enacted to reduce its spread, and changing consumer behaviors. Particularly heading into the critical holiday shopping season, it’s an ominous development for many traditional brick-and-mortar retailers. It does bode well for those retailers with a significant online footprint or those that can accommodate a contact-free shopping experience.
The good news is that the combination of an effective vaccine and a fiscal bridge to support the economy in the coming months creates a very plausible path forward to a more durable economy and a more optimistic outlook next year. The challenge will be navigating the near-term uncertainty before the economy and the country emerge on the other side.
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