Pessimism confirmed: Consumer sentiment plummets to 40-year low

AP Photo/Patrick Semansky

Remember when Karine Jean-Pierre refused to admit on Wednesday that Americans have grown much more pessimistic about the economy? Good times, good times. A new report from the University of Michigan shows consumer sentiment has plunged to a 40-year low, while inflation hit a new 40-year high at the same time:

The University of Michigan’s gauge of consumer sentiment fell sharply to a record low reading of 50.2, down from a May reading of 58.4. Economists polled by the Wall Street Journal had expected an June reading of 59.

The level is comparable to the low point reached in the middle of the 1980 recession, U Mich said.

Americans’ expectations for overall inflation over the next year rose to 5.4 in June from 3.3% in May, while expectations for inflation over the next 5 years jumped to 3..3% from 3% in the prior month.

Gee, who could have predicted a falloff in consumer sentiment? The Wall Street Journal, for one, which ran the poll at which Joe Biden’s press secretary scoffed. They found that 83% of respondents thought the economy was either poor or “not so good,” only 27% thought their financial situation would improve over the next few years, and the poll registered the highest level of discontent in 50 years of running the survey.

But if you can’t trust the WSJ, then the Washington Post poll report yesterday should have prepared everyone for this level of pessimism:

Most Americans expect inflation to get worse in the next year and are adjusting their spending habits in response to rising prices, according to a poll conducted by The Washington Post and George Mason University’s Schar School of Policy and Government.

Inflation, which is near 40-year highs, has lifted the cost of just about everything, including essentials such as gas, groceries and housing. Overall prices are up 8.3 percent in the past year.

Families are feeling the pinch. Nearly 9 in 10 Americans say they’ve started bargain-hunting for cheaper products, and about three-quarters are cutting back on restaurants and entertainment, or putting off planned purchases, according to the Post-Schar poll conducted in late April and early May.

The sudden drop in consumer sentiment is only surprising in terms of its suddenness. Inflation has eaten away at wages and buying power for more than a year, as today’s BLS report on wages shows:

Combined with a slight decline in hours worked in the past year, Americans have lost a net 3.9% of adjusted gross income over the past year. They’re going backwards in this inflationary environment, and the trend is accelerating over the last few months. With that in mind, one may have to ask why and how consumer sentiment has remained as high as it has been thus far.

It’s not just consumer sentiment that’s dropping:

Stocks dropped on Friday after a highly anticipated inflation report showed a faster-than-expected rise in prices and consumer sentiment hit a record low.

The Dow Jones Industrial Average shed 690 points, or 2.1%. The S&P 500 fell 2.5%, while Nasdaq Composite sank 3.1%. …

The hot inflation flamed concerns about a potential recession for the U.S. economy. Elsewhere, the preliminary June reading for the University of Michigan consumer sentiment index came in well below expectations, hitting a record low.

“It just reinforces the impact the CPI number had on consumer psyche. We can guess this is going to have a negative future impact on consumer spending. It’s a shocking number but this is what inflation does when it’s running as hot as it is,” said Peter Boockvar of Bleakley Advisory Group.

And investor sentiment is likely to get worse. The White House had tried to jolly people along by insisting that inflation had “peaked” and that it would start retreating in the near term. A look at last month’s producer price index (11% and “accelerating”) should have scotched that spin, but spin is all this White House has at the moment.  The Federal Reserve has not been fooled by it, and plans to roll out a series of significant rate hikes over the next few months:

Another high inflation report is likely to lead more Federal Reserve officials to anticipate a fourth consecutive half-percentage-point rate rise will be warranted at their meeting this September.

The Fed has already indicated it will raise rates by a half point at its meeting next week and that it is very likely to do so again in July. Officials have said that they would continue to raise rates at that pace if inflation doesn’t show signs of a convincing slowdown. …

The Fed raised rates last month by a half percentage point for the first time since 2000, bringing its benchmark short-term interest rate to a range between 0.75% and 1%.

Fed Chairman Jerome Powell said the central bank could continue to raise rates at that pace until it sees conclusive evidence that inflation is easing, and Friday’s report offered the opposite.

“Truthfully, this is not a time for tremendously nuanced readings of inflation. We need to see inflation coming down in a convincing way…and until we see that, we’re going to keep going,” Mr. Powell said in an interview last month. “We’re not going to assume that we’ve made it until we see that, and we’re not seeing that right now.”

Reuters polled economists this week, even before the latest data emerged, and they don’t expect the Fed to curtail its anti-inflation interventions. They now expect to see at least three 50-basis-point hikes, and perhaps a fourth or fifth as well. That sharp tightening of the money supply will impact business investment and expansions as well as mortgages for consumers. It will slow down the economy well before consumers get a chance to make gains to their eroded buying power, which won’t do much for consumer sentiment in the short and medium terms. The tighter money supply probably won’t do much for investor sentiment either.

Neither will this:

Better get your Biden Blamethrowing Bingo cards ready for this event. Get five of these on today’s card and win yourself, uh … a “major thing.” Or a very bad Q3 when it comes to consumer spending, and maybe even a bad Q2, which means we may all win a classic recession ahead of the midterms.