High interest rates, stock market turmoil add to consumer worries
Consumer sentiment declined 5% below October, eroding about one-third of the overall gain seen since the historic low in June, according to the University of Michigan Surveys of Consumers.
Buying conditions for durables, which had markedly improved last month, decreased most sharply in November, falling back 19% on the basis of high interest rates as well as continued high prices, said U-M economist Joanne Hsu, director of the surveys. Long-term business conditions declined a more modest 6%, while short-term business conditions and personal finances were essentially unchanged.
“Headwinds to consumer strength have started to emerge. Strong incomes have thus far helped consumers, particularly lower-wage workers, cope with high inflation,” she said. “However, their perceptions of weakening labor markets could make them pull back their spending in the future. Wealthier households are experiencing declining stock markets and home values, which would also produce drag on their willingness to spend.”
Concerns emerge over high interest rates
Consumers have taken notice of rising interest rates, Hsu said. About 83% of consumers report that it is a bad time to buy a house, the highest share ever recorded. While the share blaming high prices has eased from the all-time high of 73% in May to 58% now, expensive interest rates were cited by 64%, the highest share since 1982, when mortgage interest rates were about double what they are now.
A growing share of consumers spontaneously cited high interest rates as a reason for poor buying conditions for durables and cars as well. In contrast to 1982, amid a recession and double-digit interest rates, current interest rates are much lower and unemployment remains near historic lows. Still, interest rates have increased borrowing costs well above what consumers had grown accustomed to in recent years, dragging down sentiment, Hsu said. These concerns are likely to increase over time, as 79% of consumers expect interest rates to rise in the year ahead, which may amplify consumers’ reluctance to borrow, she said.
Higher-income families weighed down by stock market turbulence
For lower-income consumers, the pain of high prices is partially offset by favorable incomes, a reflection of continued labor market strength for lower-wage jobs, Hsu said. While higher-income consumers are partially buffered from inflation through their wealth, they have felt the impact of turmoil in financial markets.
About 16% of middle-income and higher-income consumers spontaneously mentioned the negative effects of declining asset prices on their personal finances. Higher-income consumers reported worse personal finances than lower-income consumers for only the second time in the survey’s history. The first time was in 2009 in the wake of the Global Financial Crisis. In fact, for four of the five components of the sentiment index, lower-income consumers reported more favorable views than those with higher incomes.
Consumer Sentiment Index
The Consumer Sentiment Index fell to 56.8 in the November 2022 survey, down from 59.9 in October and below last November’s 67.4. The Current Index fell to 58.8, down from 65.6 in October and below last November’s 73.6. The Expectations Index fell to 55.6, down from 56.2 in October and below last November’s 63.5.
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.