Why Should You Care about Consumer Sentiment?

TAKEAWAYS KEY

• The University of Michigan’s Consumer Sentiment Index fell for the fourth consecutive month.
• The university's measure, along with a similar measure from the Conference Board, has shown consumers remain less confident in the economy than they were before the pandemic.
• These measures can give you insights into why prices of goods and services are elevated, why it's more expensive to borrow money, and whether or not you can get a raise.

A measure of consumer confidence fell again in June, which could have an impact on your finances.

The University of Michigan's consumer sentiment index fell to 68.2 in June, which was a smaller drop than economists expected but still down from May. While the university's survey isn't the only measure of consumer sentiment, it reinforced the notion that Americans are increasingly down on the state of the economy and their own finances.

In general, consumer confidence dropped sharply in 2020 due to the pandemic that caused economic uncertainty and job loss. As the economy recovered, these numbers began to improve and peaked in 2020. Consumers' feelings about the economy never returned to pre-pandemic levels and since 2021 have trended down.

Why should you be concerned about what other people think about the economy. Consumer confidence can factor into whether your grocery bill will continue to be high, whether or not you can get a loan, or if you'll receive a raise.

Consumers' Expectations Can Be a Self-Fulfilling Prophecy

The consumer’s mood is closely related to inflation, because widespread price increases immediately affect household budgets. When inflation is high it can affect how people feel about a broader economy. Survey respondents expect high inflation to continue.

This affects business leaders when they set prices for goods and services. When price-setters are anticipating high inflation, many charge more in order to account for higher costs of labor and materials.

On the other hand, when consumers feel good about their economy, they will also be more willing to spend. Business leaders monitor consumer sentiment in order to know when to increase production. If the consumer sentiment is high, producers often produce more to plan for demand. This can drive prices down.

Bankers make decisions based on consumer sentiment

You can also consider how consumers feel about their economy if you want to know why it is harder or more expensive for them to borrow money.

Banks will take into account consumer sentiment when making decisions about the amount of credit to extend. If consumer confidence is low it can be a sign to lenders that borrowers may not have confidence in their ability repay any money they borrow. This has been apparent in recent times as lenders have increased the amount of collateral required and limited the size of loans.

By using the Consumer Confidence Index they can decide how much interest to charge and when to offer loans.

Central bankers also consider consumer sentiment when deciding monetary policies. In today’s high-interest-rate climate, Federal Reserve officials use consumer sentiment as a guide to consumer behavior when deciding whether to cut interest rates.

Does low consumer confidence do me any good?

Low consumer confidence is correlated with higher prices, inflation, and fewer options for loans. You could get more money if you can keep up.

Workers will ask for larger pay increases to maintain their purchasing power if they predict higher inflation ahead. Companies are also likely to be bracing themselves for higher inflation and are calculating wage increases as costs they pass on to consumers. This can lead to a spiraling wage-price relationship.

“If you run a business, it’s important to be able compensate employees and creditors in a way they can accept. If they feel inflation will be 45% for years to come, they would ask you for more year after year—simply so they can tread water,” wrote Kartik B. Athreya for the Federal Reserve Bank of New York.