Consumer sentiment slipped modestly in September
The consumer story has been relatively unchanged for some time: the economic outlook remains mixed — not as negative as it was a year ago but still far from upbeat. That’s a reality that reflected in the modest decline in the University of Michigan Index of Consumer Sentiment last month from 69.5 to 67.7. Despite a modest firming in their outlook six months out, it’s their assessment of the current environment that has darkened.
The aggregate assessment of current economic conditions faltered in September, slipping by nearly six points from 75.7 to 69.8. There’s a realization that all is not well in the economy, despite significant progress in lowering inflation and an emergent optimism that a soft landing could still be in the cards.
Despite two quarters of negative GDP growth, the economy avoided a recession early last year. Still, the challenges presented by a degree of inflation unseen in decades eroded both consumer confidence and spending power. The economy may have grown, but the average household certainly didn’t feel that they were getting ahead.
Fast forward to 2023 and inflation pressures are receding, but concerns remain. There’s a growing sense that although the worst of the inflation surge has now passed, a return to the sub-2% environment that helped to characterize the pre-pandemic economy for a decade may not be soon to return. As wage growth recedes, even a slower pace of consumer inflation could be tough for consumers to swallow.
Moreover, the risk of a recession in the coming year continues to bubble, despite hopes that resilient growth in recent months could be extended as inflation eases.
In the near term, the economy’s resiliency has inspired a bit of optimism that perhaps the Fed can stick the landing this time after all. The economy hasn’t reached stall speed and the labor market, while also slowing, continues to chug along.
Even so, the full effect of Fed rate hikes has yet to be felt and is expected to continue to slowly permeate the economy, creating further growth headwinds ahead. It’s a risk that could be exacerbated by other factors: an extended labor strike impacting the auto industry, a potential federal government shutdown, the resumption of student loan payments, and rising energy prices.
That’s not to suggest that a soft landing isn’t still possible. It is — but it’s far from a lock. Achieving it will require consumer spending to be sustained at a constructive clip even as other forces converge that would make that more difficult. Can falling inflation partially offset those headwinds? Do consumers still have sufficient dry powder to overcome those potential hurdles? Will they continue to demonstrate the appetite to do so? The answers to those questions will have a significant impact on the direction and relative strength of the economy in the coming year.
The bottom line? The collective consumer mood remains tentative — not as negative as a year ago when recession fears were high but still cognizant of the range of risks that continue to bubble.
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