Consumer sentiment fell for the first time in four months in the wake of a 13% decline in consumers’ outlook over the economy for the year ahead, according to the University of Michigan Surveys of Consumers.

Declines in sentiment were visible across age, education and income. Due to continued pressure from high prices, consumer sentiment experienced downward momentum prior to the collapse of Silicon Valley Bank and the financial turbulence that ensued. Still, consumer attitudes remained more favorable than a year ago, said U-M economist Joanne Hsu, director of the surveys.

“News about banks and financial markets are much less relatable to the typical American consumer than news about inflation, unemployment or politics. As such, the recent bank failures played a very minor role in this month’s declines in consumer sentiment,” she said. “However, if the current turbulence in the banking sector leads to tightening borrowing conditions, further deterioration of consumer attitudes is likely to follow.”

Effects of banking turbulence limited

While economic news earlier this month was dominated by developments at Silicon Valley Bank, Credit Suisse and vulnerabilities in the financial sector, our data indicate limited impact of these developments on consumer attitudes, Hsu said.

Overall, the average consumer has little portfolio exposure to financial markets and typically does not pay close attention to financial market developments that do not directly impact them, she said. The modest response of sentiment to the recent bank failures is consistent with trends seen during previous bank failures, including those associated with the Global Financial Crisis or the savings and loan crisis.

High prices outweigh concerns over unemployment

According to Hsu, while inflation has moderated from its peak and sentiment has lifted from its trough last summer, consumers were relatively downbeat about the trajectory of the economy. Amid continued high prices and rising borrowing costs, consumer perceptions of buying conditions for large durable goods, vehicles and homes all worsened in March.

Inflation continued to be a drag on consumer attitudes; the last three months have consistently shown that about 38% of consumers blamed inflation for eroding their personal finances. But consumers still continue to expect strength in their incomes and in labor markets, Hsu said.

College-educated consumers had particularly large improvements in their outlook for labor markets, she said. Their views indicate that recent layoff announcements, though disproportionately affecting higher-wage jobs, are not necessarily expected to spread throughout the economy. About 78% of consumers expect inflation to cause more serious hardship in the year ahead than unemployment, down only slightly from a year ago. All told, consumers’ outlook for the economy deteriorated this month, weakened by persistently high prices.

Consumer Sentiment Index

The Consumer Sentiment Index fell to 62.0 in the March 2023 survey, down from 67.0 in February and above last March’s 59.4. The Current Index fell to 66.3, down from 70.7 in February and below last March’s 67.2. The Expectations Index fell to 59.2, down from 64.7 in February and above last March’s 54.3.

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
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