Consumer sentiment: Positive business outlook outweighs unemployment concerns
Consumer sentiment lifted for the third straight month in February, rising a modest 3% above January, supported by a 12% improvement in consumers’ outlook over the economy for the year ahead, according to the University of Michigan Surveys of Consumers.
However, sentiment remains well below its historical average; in spite of the recent slowdown in inflation, overall prices are still painfully high for consumers and continue to be at the forefront of their minds, said U-M economist Joanne Hsu, director of the surveys.
About 38% of consumers reported that their living standards are being eroded by inflation, down from a peak of 49% in July 2022 but still elevated relative to a year ago.
“Consumers have noted both positive and negative developments in the economy,” Hsu said. “On one hand, worries about rising unemployment have emerged for some amid layoff announcements. On the other hand, labor markets continue to enjoy historic strength, supporting robust income growth. Consumers will weigh the balance of factors, focusing on implications for their own budgets, as they make decisions on spending or saving.”
Labor markets expected to soften, but income expectations remain strong
With unemployment at its lowest rate in nearly 70 years, about 40% of consumers expect unemployment to increase in the year ahead, compared with only 25% a year ago. Concerns are most prominent among higher-income consumers, whose views have been weighed down by well-publicized layoffs largely affecting white-collar workers.
In contrast, lower-income consumers have shown more optimism over the trajectory of labor markets. Still, most consumers do not expect to be personally affected by weakening labor markets. Expected income growth over the next year remains robust, even for the high-income consumers most concerned about unemployment.
As such, while consumers continue to adjust their spending in light of high prices and interest rates, their total spending is likely to remain robust, at least in the short run, Hsu said.
Partisan differences in sentiment narrow but remain prominent
With the new Congress divided, gridlock over economic policy is likely to ensue, Hsu said. Sentiment among Republicans surged 12% in February, reaching their highest reading in 16 months. Meanwhile, sentiment rose only slightly for Democrats and Independents.
Despite the recent narrowing, the partisan gap persists, with a 25-point wedge in sentiment between Republicans and Democrats this month, about two-thirds of the average gap since February 2017. Across political affiliations, opinions about the government’s economic policies have moved sideways over the last several months.
The debt ceiling crises in 2011 and 2013 spurred steep declines in consumer sentiment. While debt ceiling negotiations may not yet be salient for most consumers, this may change in the months ahead as key deadlines approach, Hsu said.
Consumer Sentiment Index
The Consumer Sentiment Index rose to 67.0 in the February 2023 survey, up from 64.9 in January and above last February’s 62.8. The Current Index rose to 70.7, up from 68.4 in January and above last February’s 68.2. The Expectations Index rose to 64.7, up from 62.7 in January and above last February’s 59.4.
About the surveys
The Surveys of Consumers is a rotating panel survey based on a nationally representative sample that gives each household in the coterminous U.S. an equal probability of being selected. Interviews are conducted throughout the month by telephone. The minimum monthly change required for significance at the 95% level in the Sentiment Index is 4.8 points; for the Current and Expectations Index, the minimum is 6 points.