Consumer Sentiment: Preliminary Results for January 2022

The University of Michigan's Index of Consumer Sentiment (ICS) -  Preliminary Results for January 2022 was released today:

Predicted: 70.0

• Actual: 68.8

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• Change from Previous Month: -2.55% (-1.8 points)

• Change from 12 Months Previous: -12.911% (-10.2 points)

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• Final ICS Reading for December 2021: 70.6
  
  
• Final ICS Reading for January 2021: 79.0

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From today's report:

"...Sentiment posted a small loss in early January (-2.5%), falling to the second lowest level in a decade, which was recorded in November (67.4). The Sentiment Index has averaged just 70.3 in the past six months, whereas in the first six months of 2021 it averaged 82.9. While the Delta and Omicron variants certainly contributed to this downward shift, the decline was also due to an escalating inflation rate. Three-quarters of consumers in early January ranked inflation, compared with unemployment, as the more serious problem facing the nation. Given that inflation's impact is regressive, the Sentiment Index fell by 9.4% among households with total incomes below $100,000 in early January, but rose by 5.7% among households with incomes over that amount. The same split was observed for prospects for the national economy, with lower income households more negative, and higher income households holding a more positive outlook. Even among the more optimistic, they are still more likely to anticipate bad rather than good economic times in the year ahead. Importantly, confidence in government economic policies is at its lowest level since 2014. It will be a difficult task to gauge the appropriate mix of fiscal and monetary policies when such fine-tuning is necessary in an era of large economic and non-economic disruptions. The most crucial and difficult task will be defusing the developing wage-price spiral.

When asked to assess their finances, 33% reported being worse off financially than a year earlier, just above the April 2020 shutdown low of 32%, the worst reading since 2014. Twice as many households with incomes in the bottom third as in the top third reported worsening finances (40% vs. 20%). Inflationary erosion of living standards was the main explanation offered by these consumers. The importance of inflation in determining their future financial prospects was dominated by how consumers judged their future inflation-adjusted incomes (see the chart). Nearly half of all consumers (48%) anticipated that the inflation rate would outdistance income increases to produce real income declines. Just 17% anticipated real income gains in 2022..."

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CHART: Expected Change in Real Income
and Personal Financial Situation in Year Ahead

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The ICS is derived from the following five survey questions:

1. "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?"
   
   
   
2. "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?"
   
   
   
3. "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?"
   
   
   
4. "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?"
   
   
   
5. "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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• Click here to view the full University of Michigan report.

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