U.S. Consumer sentiment posts record drop in April

*The University of Michigan Consumer Sentiment Index declined by 17.3pts to 71.8 in April from 89.1 in March, its largest monthly decline on record, reflecting the COVID-19 health crisis that is also seriously affecting economic well-being (Chart 1). The survey’s current conditions index declined by 29.4pts to 74.3 in April from 103.7 in March, significantly narrowing the gap with the expectations index, which declined by 9.6pts to 70.1 (Chart 2).

*Consumer sentiment will be critical in gauging the shape of the recovery in consumption, especially as some states attempt to reopen their economies in coming weeks. Households will need confidence that the acute stage of the pandemic has passed and that normal activities are safe – which hinges critically on confidence in medical and health delivery systems, and readily available testing for COVID-19. As such, we expect a very gradual and uneven recovery.

A greater share of households characterized their finances as worse than a year ago in April (Apr.: 32%, Mar.: 21%), and the median 1-2 year ahead expectation for income growth tumbled to 0.4% from 1.9%. These downgrades reflect the 52% of consumers who now expect higher unemployment over the next year, more than double the pre-crisis share of 23%. The massive job losses reflected in initial jobless claims, which have totaled 26m between March 15 and April 18, are weighing heavily on confidence (US initial jobless claims fall for third consecutive week but remain historically high, April 23, 2020).

Elevated uncertainties about the future and loss of jobs will lead to very cautious consumer spending behavior, resulting in an increase in the rate of personal saving. Indeed, only 41% of consumers said it was a good time to buy a large household item in April, down significantly from 68% in March. The 57% of consumers saying it was a good time to buy a vehicle was the lowest in eight years.

Consumers’ expectation for inflation over the next year declined to 2.1% from 2.2%, a surprisingly small decline given the sharp drop in oil prices, but it is still the lowest expectation since March 2009 (Chart 3). We expect a modest bout of deflation, reflecting insufficient aggregate demand relative to constrained supply that will put downward pressure on prices.

Chart 1:

Chart 2:

Chart 3:

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

Member FINRA & SIPC
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