The University of Michigan’s Consumer Sentiment Index fell slightly to 79.0 in late January, as high COVID-19 case numbers, continued lockdowns, and rising jobless claims weighed on the consumer mood. Survey results indicated an acknowledgement that economic conditions have weakened in the past month but had little effect on consumer expectations for the economy in the coming months, which were already subdued.
Consumers are still much more cautious in their outlook than was the case a year ago, before the spread of COVID-19 forced nationwide lockdowns last March. While the ramp-up of vaccinations across the country is a positive sign that a return to a more normal environment may be on the horizon, it will take time to get a large portion of the population vaccinated, and new COVID-19 strains have raised questions about the effectiveness of vaccines against those emerging strains.
Given the speed and magnitude of last year’s economic decline, the fact that consumer sentiment wasn’t harder hit might seem surprising. The sharp rebound last summer provided reassurance that a prolonged period of depressed activity would be avoided, while the rapid delivery of expanded unemployment benefits and support for many impacted businesses helped to alleviate the negative effects of the shutdowns.
In the immediate aftermath of the election, consumers also acknowledge expectations for a marked change in policy under the Biden administration. The headline survey result reflects the aggregate view of respondents but doesn’t quantify the churn in consumer attitudes about the direction of the economy. Unsurprisingly, those self-identifying as Republicans expressed a much darker outlook for the economy than they did prior to the election. For Democrats, the opposite was true as a sense of renewed optimism was clear.
In the coming months, the speed of the vaccination efforts and continued effectiveness of the vaccine on new strains will be important factors impacting consumers’ assessment of current and future conditions. The potential for additional stimulus from Washington in the near term may also give consumers a financial boost and alleviate some concerns particularly for those directly impacted financially by current conditions.
Far and away, the risk presented by COVID-19, the restrictions put in place to reduce its spread, and the effectiveness and speed of vaccine distribution remain the primary drivers of the economic outlook over the coming months. The near-term outlook is somewhat restrained, but the prospect of a resurgence in conditions improves considerably in the near future.
When restrictions are lifted and consumer moods do eventually improve, spending is likely to pick up significantly as pent-up demand is unleashed after a long period of restrictions and caution.
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