US consumers start November in a glum mood

November is known for bringing the SADs, and that carried over to the consumer mood this month.

In a preliminary data release for November, consumer sentiment was down sharply from October in the first weeks of November, according to the University of Michigan Survey of Consumers.

Sentiment to stat November fell 9% below October, to 54.7. That erases half of the gains that were made since the index hit an all-time low in June as inflation peaked, according to Survey director Joanne Hsu.

The prospects for buying durables, which are goods designed to last more than three years, have especially dimmed. Buying conditions in this category fell 21%, as rising interest rates from the Federal Reserve’s recent rate hikes compounded the impact of high prices during this period of 40-year-high inflation.

The flagging sentiment was observed across demographics, "regardless of age, education, income, geography or political affiliation," according to the Survey.

While sentiment has been near historic lows this year, there were some signs of optimism emerging in recent months. During that period, consumer spending held relatively stable in the face of rising prices. However, the Fed’s campaign of interest rate hikes are designed to cool demand, which could add to further dampen the spending mood.

The consumer sentiment report follows a separate consumer confidence reading from the Conference Board for October that showed a more pessimistic mood heading into the holidays. The UMich survey had ticked up in October, but only slightly. Yet it was notable that buying conditions for durables rose 23% in that report, where they fell nearly the same amount here.

Survey of Consumers Director Joanne Hsu wrote that this latest dip in sentiment suggests that the gains made in recent months were “tentative.”

“Instability in sentiment is likely to continue, a reflection of uncertainty over both global factors and the eventual outcomes of the election,” Hsu said.

When it comes to consumers’ outlook for inflation, there is more stability, even at a time when prices continue to be elevated. Little changed from the prior month in November so far. The median expected year-ahead inflation rate was 5.1%, up from 5% last month. Long-term expectations are currently at 3%. This measure is watched by the Federal Reserve for signs that consumers are viewing inflation as a feature of the economy for the near future, rather than a bug. If they expect high prices, they may ask for raises, which would in turn continue to drive prices up, and lead inflation to become more entrenched.

These expectations have been “elevated,” but have remained in a narrow 2.9-3.1% range for 15 of the last 16 months, indicating that expectations aren’t changing. Fed Chair Jerome Powell has indicated during this period that inflation expectations remain “well anchored," but he stressed that the central bank does not want to see inflation last long enough to become entrenched.

There’s one caveat: This measure came before the October reading of the Consumer Price Index showed inflation had cooled to 7.7% for the month. But inflation is still very high, and the index makes clear that inflation isn’t the only thing shaping feelings. Politics and war are there. Recession worries for 2023 and beyond loom. Now monetary policy is a factor, too. As the Fed’s rate hikes work their way through the economy and begin to show up in mortgages, car loans and other interest rates, the index suggests they could become the next reason that people pull back on discretionary spending.