Plunge in confidence due to economics, emotions

August 27, 2021
Written By:
Bernie DeGroat

Consumer sentiment fell in August by 13.4% from July, recording the least favorable economic prospects in more than a decade, according to the University of Michigan Surveys of Consumers.

The Sentiment Index has only recorded larger losses in six other monthly surveys since 1978, with the largest losses in how consumers viewed future economic prospects, said U-M economist Richard Curtin, director of the surveys. The losses were widespread across all demographic groups, regions and for all aspects of the economy.

“The August free-fall in confidence was in response to mounting issues, including rising inflation, small wage gains and slower declines in unemployment,” he said. “The falloff also reflected an emotional response to people’s dashed hopes that the pandemic would soon end and lives could get back to normal.

“This is not the first time emotion has partly determined economic behavior. Twenty years ago, the terrorist attacks on 9/11 led to an emotional retrenchment in spending. Although economic expectations improved by year-end, the emotional impact on spending patterns lasted much longer. The same type of persistent impact is now likely to reoccur.”

Negative impact of inflation spreads

One in five households in August cited the negative impact of inflation on their budgets, up from just 1 in 20 at the start of the year. Complaints that rising inflation had lowered their living standards were voiced by 30% of those aged 65 or older, by 24% of those with a high school education or less, and by 23% of households with incomes in the bottom third. Expected income gains among consumers under 45 fell to 3.6% from July’s 4.4%, and income gains expected by those with incomes in the top third fell to 2.4% from 2.8% in July.

Slower growth in economy expected

Consumers also became more pessimistic about further declines in the national unemployment rate, despite the record job openings, Curtin said. Just 38% of consumers anticipated a decline in the jobless rate, down from 52% last month. This likely reflects an anticipated overall slowdown in the pace of economic growth in the year ahead, as just 31% thought the economy would improve, well below last month’s 45% and the 50% in June, he said.

Fewer consumers thought prospects for the economy were good for the year ahead (32%, down from July’s 50%), and the majority (58%) expected a renewed downturn over the longer term.

Consumer Sentiment Index

The Consumer Sentiment Index fell to 70.3 in August 2021, sharply below the 81.2 in July, and just below the low of 71.8 set during the economic shutdown in April 2020. The Expectations Index component posted by far the largest decline, falling to 65.1 in August from 79.0 in July, while the Current Conditions Index posted a more modest decline, falling to 78.5 in August from June’s 84.5.

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.

Surveys of Consumers
U-M Institute for Social Research