Consumer sentiment fell by more than five points in November

Against a backdrop of persistent inflation that continues to challenge household budgets and growing recession risk, consumers have understandably downtrodden in their assessment of the economy. That bleak assessment didn’t improve so far in November.

The University of Michigan’s survey of consumers showed further slippage this month, as the collective assessment of current economic conditions darkened considerably, and the near-term outlook also dimmed.

The index declined by more than five points to 54.7 in early November, falling well short of expectations. The subindex focused on current economic conditions fell precipitously from 65.6 to 57.8, the primary driver behind the headline index decline. The index of expectations six months out also declined from 56.2 to 52.7.

With the most recent swoon, the sentiment index is reapproaching its multidecade low of 50.0 reached earlier this year.

It’s notable that the survey was completed before the release of the better-than-expected October CPI report, which was met enthusiastically by investors looking for any sign that inflation pressures are rolling over and the end of Fed rate hikes might be within sight. That could benefit the next round of the survey a few weeks out.

For now, both inflation and higher borrowing costs are squeezing household spending. For low-income households in particular, higher prices for essentials limit discretionary spending, crimp savings, and contribute to higher credit card debt. Still, it’s not only lower-income consumers that are feeling the weight of rising prices and higher interest rates. The decline in sentiment has been broad-based, cutting across geographic and economic strata.

Also noteworthy is that this darkening mood aligned with midterm elections that, based on preelection polling, were expected to provide a significant boost to Republican representation in congress. A midterm rebuke of the status quo is far from unusual, particularly given the economic challenges. Republicans gained seats, although the final tally won’t be clear until after the Senate runoff election in Georgia. The fact that the expected “red wave” fell well short of expectations suggests that despite the sour mood, voter dissatisfaction may not have been overwhelmingly aimed at one party and suggests that considerations beyond the economy factored heavily into the outcome.

If there’s good news to be found in the survey, it’s that consumers still believe that the current inflation challenges will prove to be temporary, although a rapid descent to the Fed’s 2% goal isn’t anticipated. Inflation expectations for one year ahead ticked fractionally higher to 5.1% — well below the October 7.7% CPI print. Long-term inflation expectations remain even more constrained at 3.0%. Actual inflation matters, but the importance of pricing expectations shouldn’t be overlooked. The fact that consumers still believe that inflation will recede toward more normalized levels over the next few years is reassuring, confirming that the Fed hasn’t lost its credibility despite falling behind the curve and moving aggressively to catch up this year.

The bottom line? Better news on October inflation didn’t come in time to provide a boost to sentiment, which declined unexpectedly. The economy may not be in recession, but for households struggling under the weight of higher prices, it certainly feels like it for many. A continued decline in price pressures will help, but growing recession risk and the potential for job losses could keep the collective mood subdued for some time to come.