The most common assessment is that emotions rather than rational judgements caused the plunge in consumer sentiment, and that those losses would be quickly reversed in next month’s survey. A more accurate summary is that resurgent Covid infections and deaths signaled an unexpectedly weaker economy and meant even higher inflation and slower wage growth than consumers had already anticipated. Emotions have long been recognized for their ability to speed an individual’s response to danger, the so-called fight or flight response. That was the adaptive function they performed in August, making consumers more cautious spenders and also raising vaccination rates in response to the Delta variant.
Reason and passion are inseparable components of economic sentiment. The sentiment measures were initially designed to reflect their dual influence, although heavily tilted toward obtaining rational assessments. All sentiment measures worldwide have adopted this dual criteria. While emotion rarely dominates, there have been many events over the past century that prompted emotional responses. Military conflicts and terrorism have been the most common examples, now joined by the horrific impact of the coronavirus.
Added to the coronavirus uncertainties, consumers are now confronted with massive shifts in economic policies. The government has already adopted monetary and fiscal policies that would not have even been contemplated a few decades ago, including some aimed at diminishing economic inequalities. The bottom line for most consumers is whether these programs will produce higher living standards, which in turn depends on expected growth rates in inflation and disposable incomes. How consumers view expected trends in inflation and incomes will shape their behavioral responses to these initiatives.
How do consumers view the recent surge in inflation? Most now believe it is a temporary reaction to pandemic disruptions and shifting spending priorities. One of the most widely cited numbers from the Michigan surveys are near- and long-term inflation expectations. A crucial element of the transient hypothesis is that if near-term inflation expectations remain firmly anchored, they will ultimately revert to a much lower expected long-term inflation rate. In August 2019, before the pandemic began, the expected year-ahead and the five-year inflation rate were nearly equal, differing by just 0.1 percentage point. By the August 2021 survey, the gap had increased to 1.7 percentage points, among the largest spreads ever recorded. Needless to say, that spread could close by either a fall in near-term inflation expectations or a rise in long-term expectations. The latter would signal the emergence of an inflationary psychology. The problem with this indicator is that it only provides a simultaneous warning, but once an inflationary psychology takes hold, it is very difficult to reverse.
An early warning sign of inflationary psychology is how consumers react to price increases in the marketplace. In the 1970’s inflationary era, favorable references to buying-in-advance of price increases rose well before increases in the inflation rate. This August, as in prior months, those rationales were very rare. Instead, consumers who complained about high prices were more likely to favor the postponement of purchases, hoping prices might decline in the future. Recent surveys found that buy-in-advance rationales were near the lowest levels in a half-century, and postponement due to high prices were near half-century peaks.
While these results provide support for the transient hypothesis, it must be remembered that the last inflationary age ended some 40 years ago. A substantial share of the population has no experience with high inflation, and has only experienced mainly energy spikes that soon dissipated. In recent months, a growing number of consumers have grasped the impact of rising inflation by forced cutbacks in their living standards. The surveys ask consumers to explain in their own words how their financial situation had recently changed. Complaints that inflation has eroded their living standards have increased over the past few months, with one-in-five households in August mentioning the damage that rising inflation had already caused. Consumers expected the damage to grow in the year ahead, with nearly half of all households anticipating lower inflation-adjusted incomes. This negative impact of inflation on household finances could easily accelerate in the months ahead. The prime candidate is the unprecedented expansion in monetary and fiscal policies.
Importantly, these findings are hardly new. They have been observed for several months. The same was true for expected changes in household incomes. The highest expected annual income gains were among those under 35, who expected annual income gains of 4.6% over the past six months, while those aged 45 to 54 anticipated annual gains of 2.6%; both lower than the expected inflation rate. Expectations of gains in stocks and home values were common, although those gains were heavily concentrated among upper income households.
What has dramatically changed is how consumers assessed the growth potential for the entire economy due to the surging Delta variant. Reason was propelled by emotion and resulted in a plunge in sentiment in the initial report on Aug. 13 and confirmed by the final data released on Aug. 27. Consumers immediately judged the economy was as likely to improve as worsen, when in the prior six months consumers were twice as likely to expect gains rather than declines. The most important consequence was that the fewest consumers in the last six months anticipated additional declines in the unemployment rate.
Job losses are the outstanding economic characteristic of the pandemic, and job losses are the most important economic threat to consumers. Even the remote possibility of a job loss can cause profound anxiety. It is hardly surprising that the resurgent Delta variant produced a strong emotional response that propelled consumers to take actions to offset their health and economic vulnerabilities. Any assessment of risks would certainly justify the heightened precautionary responses of consumers driven by and prioritized by emotions.
Guest commentaries like this one are written by authors outside the Barron’s and MarketWatch newsroom. They reflect the perspective and opinions of the authors. Submit commentary proposals and other feedback to ideas@barrons.com.
Consumer Sentiment is Low and Fear is High Amid Inflation and the Delta Variant
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Consumers became more cautious spenders in August as fears of a resurgent pandemic and inflation took hold, writes Richard Curtin.
ED JONES/AFP/Getty Images
Richard Curtin is a research professor at the University of Michigan and has directed the consumer sentiment surveys since 1976.
Consumer sentiment fell in August by the seventh-largest amount in the past half century, indicating the least favorable economic prospects in the past decade. Those results from the surveys conducted by the University of Michigan were as troubling as puzzling. Will consumer demand wane in the months ahead, or were the survey results simply erroneous?
The most common assessment is that emotions rather than rational judgements caused the plunge in consumer sentiment, and that those losses would be quickly reversed in next month’s survey. A more accurate summary is that resurgent Covid infections and deaths signaled an unexpectedly weaker economy and meant even higher inflation and slower wage growth than consumers had already anticipated. Emotions have long been recognized for their ability to speed an individual’s response to danger, the so-called fight or flight response. That was the adaptive function they performed in August, making consumers more cautious spenders and also raising vaccination rates in response to the Delta variant.
Reason and passion are inseparable components of economic sentiment. The sentiment measures were initially designed to reflect their dual influence, although heavily tilted toward obtaining rational assessments. All sentiment measures worldwide have adopted this dual criteria. While emotion rarely dominates, there have been many events over the past century that prompted emotional responses. Military conflicts and terrorism have been the most common examples, now joined by the horrific impact of the coronavirus.
Added to the coronavirus uncertainties, consumers are now confronted with massive shifts in economic policies. The government has already adopted monetary and fiscal policies that would not have even been contemplated a few decades ago, including some aimed at diminishing economic inequalities. The bottom line for most consumers is whether these programs will produce higher living standards, which in turn depends on expected growth rates in inflation and disposable incomes. How consumers view expected trends in inflation and incomes will shape their behavioral responses to these initiatives.
How do consumers view the recent surge in inflation? Most now believe it is a temporary reaction to pandemic disruptions and shifting spending priorities. One of the most widely cited numbers from the Michigan surveys are near- and long-term inflation expectations. A crucial element of the transient hypothesis is that if near-term inflation expectations remain firmly anchored, they will ultimately revert to a much lower expected long-term inflation rate. In August 2019, before the pandemic began, the expected year-ahead and the five-year inflation rate were nearly equal, differing by just 0.1 percentage point. By the August 2021 survey, the gap had increased to 1.7 percentage points, among the largest spreads ever recorded. Needless to say, that spread could close by either a fall in near-term inflation expectations or a rise in long-term expectations. The latter would signal the emergence of an inflationary psychology. The problem with this indicator is that it only provides a simultaneous warning, but once an inflationary psychology takes hold, it is very difficult to reverse.
An early warning sign of inflationary psychology is how consumers react to price increases in the marketplace. In the 1970’s inflationary era, favorable references to buying-in-advance of price increases rose well before increases in the inflation rate. This August, as in prior months, those rationales were very rare. Instead, consumers who complained about high prices were more likely to favor the postponement of purchases, hoping prices might decline in the future. Recent surveys found that buy-in-advance rationales were near the lowest levels in a half-century, and postponement due to high prices were near half-century peaks.
While these results provide support for the transient hypothesis, it must be remembered that the last inflationary age ended some 40 years ago. A substantial share of the population has no experience with high inflation, and has only experienced mainly energy spikes that soon dissipated. In recent months, a growing number of consumers have grasped the impact of rising inflation by forced cutbacks in their living standards. The surveys ask consumers to explain in their own words how their financial situation had recently changed. Complaints that inflation has eroded their living standards have increased over the past few months, with one-in-five households in August mentioning the damage that rising inflation had already caused. Consumers expected the damage to grow in the year ahead, with nearly half of all households anticipating lower inflation-adjusted incomes. This negative impact of inflation on household finances could easily accelerate in the months ahead. The prime candidate is the unprecedented expansion in monetary and fiscal policies.
Importantly, these findings are hardly new. They have been observed for several months. The same was true for expected changes in household incomes. The highest expected annual income gains were among those under 35, who expected annual income gains of 4.6% over the past six months, while those aged 45 to 54 anticipated annual gains of 2.6%; both lower than the expected inflation rate. Expectations of gains in stocks and home values were common, although those gains were heavily concentrated among upper income households.
What has dramatically changed is how consumers assessed the growth potential for the entire economy due to the surging Delta variant. Reason was propelled by emotion and resulted in a plunge in sentiment in the initial report on Aug. 13 and confirmed by the final data released on Aug. 27. Consumers immediately judged the economy was as likely to improve as worsen, when in the prior six months consumers were twice as likely to expect gains rather than declines. The most important consequence was that the fewest consumers in the last six months anticipated additional declines in the unemployment rate.
Job losses are the outstanding economic characteristic of the pandemic, and job losses are the most important economic threat to consumers. Even the remote possibility of a job loss can cause profound anxiety. It is hardly surprising that the resurgent Delta variant produced a strong emotional response that propelled consumers to take actions to offset their health and economic vulnerabilities. Any assessment of risks would certainly justify the heightened precautionary responses of consumers driven by and prioritized by emotions.
Guest commentaries like this one are written by authors outside the Barron’s and MarketWatch newsroom. They reflect the perspective and opinions of the authors. Submit commentary proposals and other feedback to ideas@barrons.com.
Read More:Consumer Sentiment is Low and Fear is High Amid Inflation and the Delta Variant
2021-09-02 14:27:00