Consumers are feeling more skittish about their spending,
with new data on consumer sentiment reflecting “the least favorable economic
prospects in more than a decade,” according to the University of Michigan’s
August survey, which recorded one of the sharpest ever plunges in the survey’s
history.
The headline index figure of 70.3 reflected a 13.4 percent
drop from the previous month, down 5.1 percent from a year earlier.
“It wasn’t a total surprise, but… we think it primarily
reflects the reality setting in that the pandemic is not, in fact, over, and
there's significant uncertainty regarding where things are going from here,”
said Garrett Nelson, senior equity analyst at CFRA Research.
“It’s a very natural reflection of how people feel,” said
Johan Grahn, head of ETF strategy at Allianz Investment Management. “The news
around us had gone from blowing optimistic winds to settling back to a less
optimistic picture.”
Economists worry that these fears will start to influence
consumer behavior and constrain the spending that powers some 70 percent of the
American economy. “It’s concerning because consumer sentiment is a leading
indicator and it's normally indicative of a coming drop in retail sales,”
Nelson said.
“The surge of the delta variant has started to impact how
comfortable consumers feel being out in public,” said Greg McBride, chief
financial analyst at Bankrate. A drop in people’s mobility and willingness to
engage in activities outside the home could distort where, how and to what
extent they spend their discretionary income. McBride said economists are most
likely to see this hesitancy reflected in a pullback in service-sector purchases
like plane tickets and restaurant meals.
Some already see manifestations of more cautious consumption
in recent data. Retail sales for July disappointed, falling 1.1 percent — about
three-quarters of a percentage point higher than expectations — with especially
sharp declines in cars, clothes and sporting goods, according to the Commerce
Department.
Retail spending this fall could be further constrained by
the winding down of the emergency unemployment insurance programs that provided
fiscal stimulus and financial support to millions of jobless Americans, Nelson
predicted. “We do think that will have a significant negative impact, but it
will be mitigated somewhat by the child tax payments,” he said.
“The delta variant is still the biggest near-term risk for
retail spending, and if we see a rebound in ecommerce because of it and
consumers staying away from stores, that's going to really hurt retailers,”
Nelson said, since in-store sales yield higher margins than their digital
counterparts.
The survey revealed that, as Americans see higher prices at
supermarkets, gas stations, home-improvement stores and car dealerships, they
are growing more worried about inflation. “Personal financial prospects
continued to worsen due to smaller income gains amid higher inflationary
trends,” Curtin said.
Federal Reserve Chairman Jerome Powell acknowledged
inflation concerns in a closely watched virtual appearance in conjunction with
the Fed’s annual policy conference on Friday, while still repeating the central
bank’s assertion that rising prices do not, for the moment, represent a
systemic risk or the development of an inflationary cycle of increasing wages
chasing rapidly rising prices.
But that message might not be getting through. “A lot of
consumers are indicating that they’re skeptical about that,” McBride said.
“Even if inflation does prove temporary, it still puts a crimp in household
budgets and could lead to softer spending,” he said.
If inflation fears begin to weigh on Wall Street as they are
on Main Street, that could reverse the sizable gains the major equities indices
have realized this year — and that, Grahn said, could deliver yet another blow
to Americans’ fading optimism.
“The market for sure will be responding to it, and that will
trigger an additional layer of anxiety,” he said. “That would be more painful.”
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