Consumer Sentiment Sinks to Lowest Level Since the Financial Crisis

What a difference a year – or even just several months – makes. The Federal Reserve, in its recently published Economic Well-Being of U.S. Households in 2021 report, informs us that Americans were doing pretty well last year. In the fourth quarter of 2021, 78% of adults said they were “either doing okay or living comfortably financially.”[1]

That does sound good. The same report also reveals that the percentage of Americans in 2021 who said they had cash to cover a $400 emergency reached the highest level since the survey began in 2013. That year, the percentage was 50%. In 2021, it was up to 68%.

But that was then – and this is now.

Last week, I discussed data that shows a large number of U.S. households are struggling to make ends meet. Since those numbers were published, we’ve learned that consumer sentiment is down – way down. In fact, the latest reading of the heavily-watched University of Michigan consumer sentiment index – an anemic 58.4 – indicates Americans haven’t been this gloomy in their views about the nation’s economic outlook for more than a decade.[2]

Other numbers also help paint a less-than-rosy economic picture of America. For example, the savings rate is sinking like a stone. At the same time, borrowing is rising substantially, suggesting Americans may be turning to credit to pay for goods and services they would otherwise purchase with cash – if they had it.

We probably shouldn’t be surprised by these trends. The “frustrating” inflation during much of 2021 now has reached painful levels unseen for more than 40 years.[3] It seems one of the consequences of that high inflation is an unhappier, less optimistic and less financially confident American.

I’m going to spend a few minutes digging deeper into some of this data. But I also will talk a little about what Americans can do – as both consumers and savers – to perhaps limit the overall impact of the inflation and broader economic uncertainty that appear to be at the root of the unpleasant numbers we’re seeing right now.

Savings Rate Plummets and Consumer Debt Jumps as High Inflation Persists

The outlook of consumers – as measured by the University of Michigan consumer sentiment index – hasn’t been this bleak since August 2011. That takes us all the way back to the years of the financial crisis.[4]

In her assessment of the latest sentiment index, survey director Joanne Hsu said, “This recent drop was largely driven by continued negative views on current buying conditions for houses and durables, as well as consumers’ future outlook for the economy, primarily due to concerns over inflation.”[5]

And the latest consumer sentiment index isn’t the only piece of relevant economic data that hearkens back to the financial crisis. The Commerce Department reports the personal savings rate – as a percentage of disposable income – plummeted to 4.4% in April.[6] Fox Business notes that’s the lowest level since 2008.[7] And experts say inflation is a big reason why Americans are tearing through their savings right now.

“We’re starting to dip into savings because what generally happens in periods of inflation is you see demand destruction because prices just get too high and people just stop consuming whatever it is,” Mitch Roschelle of economic strategy firm Macro Trends Advisors LLC told Fox Business. “While we haven’t truly seen demand destruction yet, the first thing that happens is people start dipping into savings because they’re not willing to slow down consumption.”[8]

In other words: While high inflation will prompt consumers to restrain spending, it also will cue others to spend down their resources for as long as they’re able to. And these resources include not only whatever savings they have available but also as much debt as they can shoulder, too.

As it turns out, consumer debt loads are rising by leaps and bounds. For example, economists predicted they’d see consumer debt increase by $17.5 billion in February. It went up $41.8 billion.[9] And the very next month, March consumer debt jumped by $52.4 billion – a year-over-year increase of 14%. Consumer debt hasn’t risen that much in a 12-month period since December 2010 – once again, the era of the financial crisis.[10]

Notably, revolving credit rose more than 35% year over year in March.[11] Examples of revolving credit include credit cards, personal lines of credit and home equity lines of credit.

Curt Long, chief economist for the National Association of Federally-Insured Credit Unions, made clear what he thinks is fueling much of the significant increase in consumer debt – and revolving credit, in particular.

“The March spike likely reflects the recent surge in inflation – particularly in gas prices – that is taking a toll on household finances.” Long said.[12]

Matt Schulz, chief credit analyst at Lending Tree, casts a worried eye to this debt and its implications, saying, “An increase in credit card debt can be a sign of confidence, or it can be a sign of concern,” Schulz said.[13]

Mindful of the reality that we are at the beginning of what’s expected to be a rather stringent rate-tightening cycle, Schulz warned, “All of this newfound debt that Americans have is only going to get more and more expensive in the coming months.”

Is there any sign of relief ahead? Maybe – but you might want guard against celebrating just yet.

Economist: Inflation Will Remain a Problem Even If It Is Slowing

Despite how ominous this data appears, there are those who see a light at the end of the tunnel.

For example, one of the popular notions about inflation right now is that it’s in the process of peaking. The latest pieces of data observers are pointing to as a sign of peak inflation are recent measures of the core personal consumption expenditures price index. The increases in core PCE – minus food and energy prices – from February through April have held steady at 0.3% for each of those months. MarketWatch notes those measures are “the smallest since last summer, when inflation’s surge briefly slowed.”[14]

But even if inflation is peaking, that doesn’t mean prices will decrease abruptly from their currently high levels. As Gus Faucher, chief economist at PNC Financial Services, said, “The slowing in inflation is very welcome, although headline inflation is likely to jump again on a monthly basis in May with another big spike in energy prices.”[15]

In other words, inflation could remain high for some time to come. Which means meaningful relief from higher prices could still be a ways off.

Also something to file away is the write-down of first quarter gross domestic product (GDP) from the initially reported -1.4% to -1.5%.[16] Economists had expected GDP for Q1 2022 to show an increase of 1%, so the 1.4% decline was enough of an unwelcome surprise.[17] Negative quarterly GDP has historically been seen as a strong indicator that a country is in or approaching recession. One unofficial definition says that two consecutive quarters of negative GDP constitutes a recession.

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[1] FederalReserve.gov, “Federal Reserve Board issues Economic Well-Being of U.S. Households in 2021 report” (May 23, 2022, accessed 6/2/22).

[2] Xavier Fontdegloria, MarketWatch.com, “U.S. Consumer Sentiment Fell Back to Decade-Lows in May — University of Michigan” (May 27, 2022, accessed 6/2/22).

[3] Jeff Cox, CNBC.com, “Fed Chair Powell calls inflation ‘frustrating’ and sees it running into next year” (September 29, 2021, accessed 6/2/22).

[4] Fontdegloria, “U.S. Consumer Sentiment.”

[5] University of Michigan Surveys of Consumers, “Final Results for May 2022” (accessed 6/2/22).

[6] Bureau of Economic Analysis, “Personal Saving Rate” (May 27, 2022, accessed 6/2/22).

[7] Suzanne O’Halloran, FoxBusiness.com, “Inflation zaps US savings rate, a warning sign for some” (May 30, 2022, accessed 6/2/22).

[8] Ibid.

[9] Lisa Beilfuss, Barron’s, “What Record Consumer Credit Says About Inflation—and Recession” (April 12, 2022, accessed 6/2/22).

[10] NAFCU Newsroom, CUInsight.com, “March consumer credit growth shows largest gain since December 2010” (May 11, 2022, accessed 6/2/22).

[11] Ibid.

[12] Ibid.

[13] ABC17News.com, “Consumer debt soared by $52 billion in March” (May 6, 2022, accessed 6/2/22).

[14] Jeffry Bartash, MarketWatch.com, “U.S. inflation rate slows to 6.3%, Fed-favored PCE gauge shows, in a sign that price pressures could be peaking” (May 28, 2022, accessed 6/2/22).

[15] Ibid.

[16] Jeff Cox, CNBC.com, “First-quarter GDP declined 1.5%, worse than thought; jobless claims edge lower” (May 26, 2022, accessed 6/2/22).

[17] Jeff Cox, CNBC.com, “U.S. GDP fell at a 1.4% pace to start the year as pandemic recovery takes a hit” (April 28, 2022, accessed 6/2/22).

[18] Harry J. Holzer, Brookings.edu, “Tight labor markets and wage growth in the current economy” (April 13, 2022, accessed 6/2/22).

[19] Megan Henney, FoxBusiness.com, “As inflation soars, one-third of Americans are experiencing financial stress: Survey” (May 20, 2022, accessed 6/2/22).