Americans are feeling worse about the economy as government shutdown drags on

The University of Michigan consumer sentiment index declined to 50.3, its lowest level since June 2022, attributed to concerns over the government shutdown and signaling potential economic weakening, contrary to analyst expectations. While sentiment improved among crucial stock market investors, widespread pessimism, particularly intensifying among the 'middle tercile' of consumers, raises concerns about future aggregate spending and top-line economic growth.

Analysis

The University of Michigan consumer sentiment index declined significantly to 50.3 this month, down from 53.6 in October, marking its lowest level since June 2022, which itself was a record low. This sharp 6.2% monthly decline, contrary to FactSet-polled economists' expectations for improvement, is attributed to widespread consumer worries regarding the ongoing government shutdown's economic consequences.

Despite this broad pessimism, sentiment improved by 11% among consumers heavily invested in the stock market, a group identified by Jefferies' Thomas Simmons as having the "biggest influence on the aggregate consumer spending data." This resilience is crucial for overall economic stability, particularly as the stock market remains near record highs.

However, the intensifying decline in sentiment among the "middle tercile" of consumers presents a significant risk. Should this group curtail its spending pace, top-line economic growth numbers could break from their current above-trend trajectory, aligning with Chris Rupkey's assessment that the economy appears "ready to roll over the proverbial cliff."

Key Decisions for Investors

• Monitor consumer spending data closely, particularly from the 'middle tercile,' as their intensifying sentiment decline poses a risk to aggregate economic growth.
• Evaluate portfolio exposure to consumer discretionary sectors, considering the divergence between resilient high-net-worth investors and broader consumer pessimism.
• Assess the duration and resolution of the government shutdown, as it remains a primary driver of current consumer sentiment and economic uncertainty.