The relatively small recent loss in consumer confidence was concentrated among households with below median incomes, and focused on future economic prospects, according to the University of Michigan Surveys of Consumers.

The worst of the pandemic may be nearing its end, but few consumers anticipate the type of widespread and persistent economic growth that will improve employment conditions to their very positive prepandemic levels, said U-M economist Richard Curtin, director of the surveys.

The recent data reaffirms the growing divide between households who retained their jobs and those that lost jobs and incomes, he said. The recent revival in spending mainly reflects declines in precautionary savings, which were predominantly held by households who had retained their jobs and incomes.

It is a common occurrence that groups that had suffered the least in a recession are the first to propel the economy forward, Curtin said. Moreover, those who have lost jobs were largely employed by those service sectors which will be the slowest to recover. Renewed financial aid to reduce hardships is needed by those with less than median household incomes, he said.

“The most attention has been garnered by rising inflationary expectations. The year ahead inflation rate was expected to be 3.3% in February, up from 3% last month and 2.5% in December,” Curtin said. “While consumers clearly anticipate a spurt in inflation in the year ahead, the data does not indicate a mounting inflationary psychology that makes the expectation of inflation a self-fulfilling prophecy.

“The key lesson learned from the last inflationary era is that it is easy to underestimate the strength of inflationary psychology and correspondingly easy to overestimate the ability of economic policies to bring an end to inflationary psychology.”

Economic gains but modest job gains

Half of all consumers expect economic conditions to improve in 2021. Unfortunately, half also anticipate that bad times financially will persist in the year ahead and half expect renewed downturns in the next five years, Curtin said. Jobs are consumers’ main concern, and consumers do not anticipate a complete recovery in jobs anytime soon.

Divergent personal finances

When asked about recent changes in their finances, higher income gains were reported by those under age 45 and among households with incomes in the top third, while wealth gains were concentrated among those with incomes in the top third. When asked about expected income increases in the year ahead, in both nominal and inflation-adjusted dollars, the same subgroups expected the largest gains.

The largest increases in spending in the year ahead will be due to drawdowns of accumulated savings as progress against covid reduces precautionary saving motives, Curtin said. Spending will also benefit from renewed financial aid and increased unemployment benefits.

Consumer Sentiment Index

The Consumer Sentiment Index was 76.8 in the February 2021 survey, down from 79.0 in January and substantially below last February’s 101.0. Most of the recent loss was in the Expectations component, which fell to 70.7 in February from 74.0 last month. The Current Conditions Index slipped marginally to 86.2 in February from last month’s 86.7.

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.

Surveys of Consumers
U-M Institute for Social Research