- The University of Michigan preliminary sentiment index fell to 46.3 in early October, the lowest since May and below the 47.6 median estimate. The current conditions gauge sank to 44.7, the lowest on record, from 50.9 the previous month.
- The internal split is unusual. While current conditions reached an all-time low, the expectations index rose to 47.3 from 46.3, its first increase since July, so consumers judge conditions as bad as they have ever been while becoming marginally less pessimistic about what follows.
- A special report on responses to higher gasoline prices found only about 31% expect to spend as usual over the coming year, with just over half saying they would cut back on household goods, cars, dining out and vacations. Views of buying conditions for durable goods fell to a record low on concerns about prices and interest rates.
- Inflation expectations ticked higher, with consumers anticipating 4.7% over the next year against 4.6% previously, and 3.5% annually over the next five to ten years, slightly above September.
What Happened?
Sentiment weakened as petrol prices stayed elevated, borrowing costs rose and hiring slowed, with overall price increases outpacing pay gains in recent months. Survey director Joanne Hsu said sentiment among lower-income consumers and those with smaller stock portfolios dropped steeply, and that increases among Democrats and Republicans were offset by a decline among independents, adding that consumers across political identifications agree the outlook has softened since before the Iran conflict. Spending has nonetheless held up, supported by a stable labour market and a buoyant stock market. The survey covers responses from September 22 to October 5.
Why It Matters?
The survey window closed on October 5, which matters a great deal this week. Since then Brent has moved back above $105 on renewed tanker attacks and US crude rose more than 5% in a single session, so the petrol prices respondents were reacting to are now higher than when they answered. A reading that already shows current conditions at an all-time low was taken before the latest escalation, which means the next release has a lower starting point than this one suggests. The divergence between current conditions and expectations is the detail worth understanding. These usually move together, and a record low in the present alongside the first improvement in expectations since July describes acute distress rather than a deteriorating outlook. That is a different problem for policymakers: present-tense pain driven by prices people are paying now, rather than fear about the future. It also explains why spending has held up, since households under immediate cost pressure but not expecting worse tend to keep spending while drawing down savings. The gasoline special report is the most actionable item and names the categories at risk directly. Only 31% expecting to spend as usual, with more than half intending to cut on cars, dining out and vacations, is a stated intention rather than observed behaviour, and intentions overstate follow-through. But it corroborates what companies are already reporting, with PepsiCo reversing price increases as volumes fell, McDonald’s guiding to slightly negative US sales, and auto affordability deteriorating as five-year Treasury yields pass 5%. Inflation expectations at 4.7% for the year ahead and 3.5% over five to ten years, both rising, are the figures the Federal Reserve will weigh most heavily, because unanchored long-run expectations are the standard justification for tightening into a supply shock. That supports the December increase markets now fully price. The distributional detail matters for a wealth management readership: lower-income households and those with smaller stock portfolios deteriorated most, meaning clients with substantial equity exposure are largely insulated from what this survey is measuring.
What Next?
Consumer price data on October 14 is the hard number against which these expectations are judged. The next sentiment release will capture responses after this week’s oil move and is likely to be weaker on current conditions. Watch whether the gap between sentiment and actual spending finally closes, since the two supports Bloomberg identifies, stable employment and rising equities, have both weakened, with hiring slowing and stocks retreating from records. Holiday season retail data will show whether the stated intention to cut discretionary spending translates into behaviour. For the Federal Reserve, long-run inflation expectations are the series to follow, and a further rise would strengthen the hawkish case at the October 27-28 meeting.
Affected Tickers and Coins: XLY, XLP
Source: Bloomberg
