January Consumer Sentiment Dragged Down by Market Volatility and Wage Expectations

It turns out the rosy consumer sentiment reading from earlier in January was a tad less rosy than the flash report indicated. The Index of Consumer Sentiment from the University of Michigan’s survey of consumers ticked down to 92.0 from the much stronger than expected 93.3 shown in the January preliminary reading. This is now lower than the 92.6 reading in December rather than being above, and it is down from 98.1 in January of 2015.

Again, this report was led by current conditions rather than by expectations. That means that the positive view is based on what is happening now rather than what is expected to be happening in the coming six months or so.

Friday’s report showed that the Current Economic Conditions came in at 106.4. That is down from 108.1 in December and down even more from the 109.3 reading from January 2015.

The Index of Consumer Expectations was set at 82.7 for January of 2016, flat with the reading from December and down a sharp 9.1 points from 91.0 reading from January of 2015.

It turns out that stock market declines did have an impact in lowering the final reading, versus the initial reading in January. Another issue is that the consumers are expecting the jobs market may have peaked and that consumers are likely to remain frugal on spending.
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The Survey of Consumers gave a rather long official quote explaining some of the January report:

Consumer confidence has remained largely unchanged, as the January reading was just 0.6% below last month’s level. The small downward revisions were due to stock market declines that were reflected in the erosion of household wealth, as well as weakened prospects for the national economy. The interviews conducted from last Friday until early this week provide no evidence that the East Coast blizzard influenced the data. To be sure, the overall level of confidence is below last January’s peak, but thus far, the decline amounts to just 6.2%, indicating slower growth, not a recession in 2016. Consumers anticipate that the growth slowdown will be accompanied by smaller wage gains and slight increases in unemployment by the end of 2016. Importantly, favorable financial prospects have become dependent on very low inflation. The Fed’s success at pushing the inflation rate higher may well exceed wage gains, thus erasing a critical strength in consumers’ financial expectations. Consumers will actively demonstrate their resistance by moderating their purchases in the face of price hikes, thus acting to offset the Fed’s rationale for higher rates.