US consumers are 'in a deep funk': What that means for the economy

As concerns around inflation soar, American consumers’ outlook on the trajectory of the U.S. economy has deteriorated, worrying some experts that negative attitudes could dampen expenditure and put a dent in economic growth.

The University of Michigan’s closely-watched consumer sentiment index fell to 61.7 in early February, hitting the lowest level since October 2011. January saw a reading of 67.2.

Recent declines in the measure have been driven by weakening personal financial prospects amid rising inflation, less confidence in the government's economic policies, and the least favorable long-term economic outlook in a decade, the University of Michigan said in its latest report Friday.

The reading follows fresh CPI data out Thursday that showed U.S. inflation accelerated last month in the fastest rise since 1982, with prices across a wide range of goods and services soaring further amid lingering shortages and supply chain disruptions.

“Incredibly, the consumer is polling negatively on almost everything when it comes to the economy, and if their confidence doesn’t improve, the economy could be headed towards the cliff of recession,” FWDBONDS chief economist Christopher S. Rupkey said in a note. “We almost have to recheck our figures because the consumer is clearly in a deep funk and if they decide to call it quits then the economic growth we have seen is going to fade fast.”

Notably, the February decline was spurred by a decline in households with incomes of $100,000 or more. Among this cohort, their Sentiment Index fell by 16.1% from last month, and 27.5% from last year, the report said, also indicating the Sentiment Index reflects the onset of a sustained downturn in consumer spending.

Typically, increasing consumer sentiment is predictive of increased consumer spending, while if consumers become less certain about their financial prospects, they could be likely to spend less money.

“A downbeat consumer in retreat risks sending the economy over the cliff if they don’t start spending more at the shops and malls,” Rupkey also wrote.

A measure in the survey of future expectations declined to a read of 57.4, also marking the lowest figure in more than 10 years. To add to the glum, consumers now expect inflation at a rate of 5% over the next year, compared to the 4.9% reported last month.

“The big drop in consumer sentiment through February is concerning,” Bill Adams, chief economist for Comerica Bank, said in a note, pointing out the indicator is down 26.6 points from its recovery-to-date high in April 2021 through the February preliminary release.

The decline compares to a 21.7 point drop between February and August 2011, a period in which inflation surged and the economy “narrowly dodged a double-dip recession,” with real GDP contracting in both the first and third quarters of 2011, he said.

“All else equal, the recent drop in consumer sentiment could signal serious trouble ahead, but all else is hugely different, thank goodness,” Adams added, elaborating that household wealth has surged since the start of the pandemic on stimulus payments, growing savings and rising wages.

Although average hourly earnings are lagging inflation, continued growth of real consumer spending power is expected with aggregate earned income still outpacing inflation due to the combination of rapid job growth and wage gains, according to Adams.

“With case counts falling rapidly and household balance sheets much better positioned to absorb inflation than in the dark days of 2011, early 2022’s drop in consumer sentiment is unlikely to signal an outright contraction of economic activity,” Adams said. “Perceptions of the economy will likely improve in coming months as the Omicron wave and supply chain problems fade and inflation begins to moderate.”

Morgan Stanley chief economist Seth Carpenter told Yahoo Finance Live that the data shows as long as job gains continue, consumer spending tends to hold up.

“Consumer sentiment numbers are a bit of a cautionary tale… but fundamentals still look pretty good,” said Carpenter.

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Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc

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