Economy: Consumer Sentiment: Preliminary Results for December 2021

The University of Michigan's Index of Consumer Sentiment (ICS) - Preliminary Results for December 2021 was released today:

Predicted: 70.0

Actual: 70.4

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Change from Previous Month: +4.451% (+3.0 points)

Change from 12 Months Previous: -12.763% (-10.3 points)

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Final ICS Reading for November 2021: 67.4
Final ICS Reading for December 2020: 80.7

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From today's report:

"...Sentiment posted a small overall gain in early December (+4.5%), although it was still nearly identical to the average reading in the prior four months (70.6). The more interesting result was the large disparity between monthly gain among households with incomes in the lowest third (+23.6%) of the income distribution compared with the modest losses among households in the middle (-3.8%) and top third (-4.3%). While small differences in the direction of change are rather common, it is quite unusual to record such a large change in the bottom third: a larger one-month percentage was recorded only once before, a gain of 29.2% in June 1980.

While it is usually assumed that such extreme changes represent an erroneous result due to small samples, in 1980 it was the households in the bottom income third that initially signaled the end of the first part of the double recession in 1980-82, with upper income households following in subsequent months. The core of the renewed optimism among the bottom third was the expectation of income increases of 2.9% during the year ahead; the last time a higher gain for this group was expected was in 1981. This suggests an emerging wage-price spiral that could propel inflation higher in the years ahead.

When directly asked whether inflation or unemployment was the more serious problem facing the nation, 76% selected inflation while just 21% selected unemployment (the balance reported the problems were equal or they couldn't choose). The dominance of inflation over unemployment was true for all income, age, education, region, and political subgroups. While a shift in policy emphasis is necessary, it will be difficult to gauge the right balance between fiscal and monetary policies that both trims inflation and maintains the unemployment rate near its current lows.

The pandemic recession had an impact on personal finances like no other crisis in more than a half century. While consumers' evaluations of their current and prospective financial situation have both declined, for the first time there has been a substantial gap between the two assessments. The decline in how consumers have judged their current financial situation was half as large as the decline in how they judged their future financial prospects. The split is presumably due to the impact of the cash stimulus and unemployment payments. Future financial evaluations have been lessened primarily by rising inflation as nearly half of all consumers expect falling inflation-adjusted incomes during the year ahead. This divergence provided financial support to the holiday spending spree, but in the months ahead many may turn their focus to changes in wages and prices.

The inflationary erosion of living standards are currently reported by one-in-four households, and those inflationary driven cutbacks have continued to spread to middle age, middle income, and middle educational groups..."

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CHART: Current and Expected
Change in Personal Finances

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The ICS is derived from the following five survey questions:

"We are interested in how people are getting along financially these days. Would you say that you (and your family living there) are better off or worse off financially than you were a year ago?"
"Now looking ahead, do you think that a year from now you (and your family living there) will be better off financially, or worse off, or just about the same as now?"
"Now turning to business conditions in the country as a whole, do you think that during the next twelve months we'll have good times financially, or bad times, or what?"
"Looking ahead, which would you say is more likely: that in the country as a whole we'll have continuous good times during the next five years or so, or that we will have periods of widespread unemployment or depression, or what?"
"About the big things people buy for their homes, such as furniture, a refrigerator, stove, television, and things like that. Generally speaking, do you think now is a good or bad time for people to buy major household items?"

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Click here for more on how the ICS is calculated.

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The ICS uses a 1966 baseline, i.e. for 1966, the ICS = 100. So any number that is below the 1966 baseline of 100 means that the folks who were polled recently aren't as optimistic about the U.S. economy as those polled back in 1966.

The ICS is similar to the Consumer Confidence Index in that they both measure consumer attitudes and offer valuable insight into consumer spending.

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The "predicted" figure is what economists were expecting, while the "actual" is the true or real figure.

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