Consumer sentiment slides to near lowest level on record as government shutdown drags on

U.S. consumer sentiment sharply declined in November, with the University of Michigan's preliminary index falling to 50.3, its lowest level in over three years and below the 53.2 forecast, primarily driven by widespread concerns over the protracted government shutdown. This broad-based apprehension, marked by significant drops in personal finance and business conditions expectations, contrasts with an 11% increase in sentiment among the top tercile of stock holders. While short-term inflation expectations edged up to 4.7%, longer-run expectations slightly eased, presenting a nuanced picture for Federal Reserve policy amid persistent inflationary pressures.

Analysis

The University of Michigan's preliminary consumer sentiment index for November registered a sharp decline to 50.3, significantly below the 53.2 forecast and marking its lowest level in over three years, nearing the June 2022 low of 50. This widespread deterioration is primarily attributed to mounting concerns over the protracted government shutdown and its economic impact.

The sentiment drop was broad-based across demographics, driven by a substantial 17% decrease in current personal finances and an 11% decline in year-ahead expected business conditions. Notably, consumers in the largest tercile of stock holdings exhibited an 11% increase in sentiment, indicating a divergence supported by continued strength in equity markets.

Inflation expectations present a mixed picture, with short-term expectations ticking up to 4.7% from 4.6%, while longer-run expectations eased to 3.6% from 3.9%. This occurs as the September CPI reached 3%, well above the Federal Reserve's 2% target, and tariffs continue to exert upward pressure on costs, complicating the Fed's efforts to keep expectations "well-anchored."

Key Decisions for Investors

• Monitor upcoming economic indicators, especially consumer spending and employment data, for further signs of economic deceleration.
• Re-evaluate portfolio allocations for resilience against potential economic headwinds and increased market volatility.
• Pay close attention to Federal Reserve communications regarding interest rate policy, given the mixed inflation expectations and persistent inflationary pressures.