Stronger economy anticipated amid appreciable risks

June 25, 2021
Written By:
Bernie DeGroat

Consumer sentiment rebounded in June to the second-highest level since the start of the pandemic, according to the University of Michigan Surveys of Consumers.

All of the June gain was among households with incomes above $100,000, and mainly in the way they judged the future economic outlook, said U-M economist Richard Curtin, director of the surveys.

Year-ahead inflation expectations fell slightly to 4.2% in June from May’s decade peak of 4.6%, and the expected recent price surges will be temporary, lasting until the economy stabilizes, he said.

Declines in unemployment rate in the year ahead were expected by 56% of consumers, the largest proportion recorded in the past half-century. The growing economic strength meant 73% of consumers expected rising interest rates in the year ahead—the highest proportion since 2018.

“When the shutdown of the economy occurred last year, consumers naturally expressed a good deal of uncertainty about their future job and income prospects,” Curtin said. “Since that April peak in uncertainty, consumers now hold much more positive job and income prospects, but not quite as favorable as in the last few years of the prior expansion.

“While many are optimistic about a gradual end to the pandemic, consumers still judged the risks from the emerging covid variants as appreciable. It is likely that consumers will not reduce their accumulated savings and reserve funds to their pre-pandemic levels, but maintain a higher level of precautionary funds.”

Widespread awareness of rising prices

Spontaneous references to high prices for homes, vehicles and household durables rose to their highest level since the all-time peak was set in November 1974 in the midst of a recession. These unfavorable perceptions of market prices reduced overall buying attitudes for vehicles and homes to their lowest point since 1982. The declines were especially sharp among households with incomes in the top third, who account for more than half of the dollar volume of retail sales.

Fortunately, offsetting a portion of the negative price effects, consumers have accumulated substantial increases in their savings balances as well as wealth, which will benefit overall spending, Curtin said.

Stronger economy expected

Consumers expect the economy to continue to gain strength in the year ahead, which prompted an all-time record number to expect continued declines in unemployment. Perhaps the best description of their expectations for the economy is a guarded optimism, Curtin said. This is especially true about the longer-term outlook for the economy, as the balance of opinion tilted in the June survey slightly toward a renewed downturn in the next five years.

Consumers anticipated that interest rates on borrowed funds will increase due to the stronger economy amid appreciable risks, although negative interest rates were still anticipated based on consumer’s inflation expectations.

Consumer Sentiment Index

The Consumer Sentiment Index rose to 85.5 in June 2021, up from 82.9 in May, but remained somewhat below the 88.3 in April. The Expectations component rose to 83.5 in June from 78.8 in May, the highest level since the expansion peak in February 2020. The Current Conditions Index fell slightly to 88.6 from 89.4 in May and well below April’s 97.2.

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