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Consumer sentiment edged slightly higher in October

October 28, 2022 Blog 1 min read
Jim Baird Wealth Management
Consumer sentiment edged modestly higher, but reflects continuing pessimism about the economy.

Consumer Sentiment - History

Despite stubbornly elevated inflation, rising interest rates, falling home prices, and volatile capital markets, the collective consumer mood improved modestly in October. The University of Michigan Consumer Sentiment Index edged up to 59.9 in its final release for the month, a result that was modestly above expectations.

That improvement, however, is only at the margins and still reflects a broad pessimism about the current state of the economy – an assessment that is not surprising given the rising price of almost everything.

Inflation has been called the most regressive tax because of its impact on lower-income consumers, and low-income households are unquestionably hurting. For many, the potential benefits of overall strong wage gains in the past few years have been erased by surging prices for food, rent, gasoline, and other essentials, leaving less room for discretionary spending.

Signs of some relief – likely tied to lower gas prices – were reflected in an uptick in sentiment for low-income households last month. Whether that will hold remains to be seen. The Fed is showing no imminent signs of letting up in its tightening campaign intended to cool labor markets and overall growth. Even if they are able to navigate a soft landing, “there will be pain,” according to Fed Chair Jerome Powell. If they push the economy into recession, that pain will be exacerbated.

More broadly, middle-income and affluent Americans have not been immune. The corrosive effects of inflation cut across all parts of the country and are being felt by everyone. Ongoing market volatility and declining home prices have weighed on the mood of middle- and upper-income households who had previously benefited from soaring asset prices since 2020.

On top of inflation, the negative wealth effect from falling asset prices poses a real risk to the outlook for consumer spending. A more pronounced pullback in consumption would considerably increase the probability of recession, making it virtually impossible to avoid.

The bottom line? The modest uptick in consumer sentiment in October moved the needle from “very pessimistic” to “slightly less than very pessimistic.” Inflation and recession risk? Still very much present. Understandably, consumers aren’t happy.

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