Consumer sentiment remains low as August winds down

U.S. consumer sentiment remained weak in late August amid ongoing concerns over inflation and the spreading COVID-19 Delta variant.

The final reading of the index of consumer sentiment from the University of Michigan was 70.3 in August, almost even with the mid-month preliminary estimate of 70.2. The final August reading was down 13.4% from July, recording the least favorable economic prospects in more than a decade.

“There was no lessening in late August in the extent of the collapse in consumer sentiment recorded in the first half of the month,” said Richard Curtin, chief economist, Surveys of Consumers, University Michigan.

The Sentiment Index has only recorded larger losses in six other monthly surveys since 1978. The losses were especially large in the Expectations Index, and widespread across all demographic groups and regions. Personal financial prospects continued to worsen due to smaller income gains amid higher inflationary trends.

“Consumers' extreme reactions were due to the surging Delta variant, higher inflation, slower wage growth, and smaller declines in unemployment,” Curtin said. “The extraordinary falloff in sentiment also reflects an emotional response, from dashed hopes that the pandemic would soon end and lives could return to normal.”

The August collapse of confidence does not imply an imminent downturn in the economy, according to Curtin.  There was a similar episode that occurred in September 2005, with comparable declines in the Sentiment Index (13.7% in 2005 vs. 13.4% in 2021). The cause of the steep falloff in 2005 was the devastation from Hurricane Katrina and rising energy prices. The impact of 9/11 was another non-economic event that had an immediate impact on consumers' expectations and emotions.

“Although economic expectations began to improve by year-end, the emotional impact on spending patterns lasted for a much longer time,” Curtin said. “That same type of persistent impact on spending patterns is now likely to reoccur.