Consumer sentiment declined in March
The aggregate consumer mood darkened a bit in March, as those surveyed expressed less confidence in the current state of the economy and greater pessimism in the outlook in the months ahead. The University of Michigan’s index fell to 62.0 in its final March reading, a sharp decline from 67.0 in February. The decline reflects growing concern about the risk of the economy tipping into recession in the coming months, despite an improving outlook for inflation.
Notably, the appearance of cracks in the banking sector in recent weeks didn’t appear to have a significant impact on survey results. The rapid response by policymakers to ringfence depositors in two failed institutions while throwing a liquidity lifeline to banks that may have been experiencing deposit outflows appears to have been successful in calming the waters at least for the time being. Whether consumers didn’t fully appreciate the scope of the risk or simply didn’t feel personally affected by the situation, it appeared to have limited influence in sentiment.
The fact that consumers are increasingly concerned about a potential recession while still expecting inflation to continue to fall suggests that they still believe the message that the Fed has been sending for some time and reiterated earlier this month.
Despite recent banking sector turmoil, the Fed’s announced rate hike and reiteration that they likely have further to go was intended to send the message that policymakers still see inflation as a threat that must be addressed. Central bank forecasts call for inflation to remain above its 2.0% target beyond 2023, supporting their perceived need to remain vigilant and guard against stepping back from their tightening bias prematurely. Additionally, their forecasts reiterated an expectation that their tightening efforts will erode growth, leading to job losses and an increase in the unemployment rate in the coming months. That message is still being met with skepticism in parts of the capital markets, where pricing suggests a lingering belief that central bank policymakers will pivot to rate cuts in response to a weaker economy in the latter half of the year. That’s a notion that Powell and his peers have been working hard to dispel.
The markets might not be listening or simply don’t believe the Fed’s message, but it appears that consumers are.
It’s been choppy waters for consumers since 2020, having navigated a pandemic, a relatively short but severe recession, and inflation unseen in 40 years. The Fed’s medicine for that inflation was a sharp, rapid tightening of policy that pushed short-term interest rates to their highest point in 15 years. It’s a prescription that comes with potential side effects — a reality that isn’t lost on consumers.
The bottom line? Recession concerns heated up in early 2022, but the economy managed to muddle through. Can it do so again? Consumers appear to be increasingly skeptical that will be the case.
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