U.S. consumer sentiment deteriorates in late March

*The University of Michigan (U. Mich.) Consumer Sentiment Index declined to 89.1 in its final estimate for March from 95.9 in its preliminary estimate, suggesting that consumer sentiment deteriorated markedly in the second half of the month as the spread of COVID-19 within the U.S. accelerated and as measures taken to contain its spread began to affect many households’ economic well-being. The 11.9pt decline in the index from February’s 101.0 is the fourth largest monthly decline on record (Chart 1).

*The U. Mich. current conditions index declined to 103.7 in its final March estimate from 112.5 in its preliminary estimate, and the expectations index declined to 79.7 from 85.3, reflective of this significant, rapidly-evolving and unique shock that is likely to affect consumer behavior even after conditions begin to return to normal (Chart 2).

*According to the survey, “if the Consumer Sentiment Index were to stabilize at its most recent seven-day average, it would imply an additional decline of nearly 18.2 Index points in April, amounting to a record setting two-month decline of 30.1 points.”

Consumers began to mark down assessments of their current finances in March, with 49% reporting better finances relative to a year ago, compared to 58% in February. The share of consumers that expect a good economy over the next 12 months plummeted to 37% from 58%. These downbeat financial and economic assessments stem from deteriorating labor market conditions. The share of consumers expecting unemployment to rise in the next 12 months jumped to 39%, the highest in almost ten years, consistent with the sharp rise in initial jobless claims and our expectation for the unemployment rate to rise to 12% in Q2 (US initial jobless claims surge to all-time high, March 27, 2020).

Elevated uncertainties about the future, and loss of jobs and incomes, will reduce spending on non-essential goods and services. Indeed, 68% of the survey’s respondents believe it is a good time to buy a major household item, compared to 75% in February, the lowest since late 2014.

Our baseline forecast is that it will take some time for households’ social behavior and buying attitudes to return to normal after the economy re-opens. The expected large number of job losses is unlikely to be reversed immediately after the acute stage of this crisis ends and households will experience considerable financial difficulties for an extended period. As a result, we expect the bounce-back in consumption growth in the second half of this year to be of a smaller magnitude than its decline in H1 (Forecasts at a glance – March 26, 2020).

The evolution of the U. Mich. Consumer Sentiment Index over the next few months will be instructive in gauging the depth of the decline in consumer activity and the start of the eventual rebound, especially given that “hard data” on consumer activity are published with a considerable lag.

Chart 1:

Chart 2:

Roiana Reid, roiana.reid@berenberg-us.com

Member FINRA & SIPC
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