Economy Will Improve but Remain Distressed

Following April’s record one-month decline, consumer confidence inched upward in May by an insignificant amount, according to the University of Michigan Surveys of Consumers.

The Sentiment Index fell 27.7% below last May’s level, with the falloff in evaluations of current conditions and future prospects posting declines of 25%-30%. The CARES relief checks and higher unemployment payments have helped to stem economic hardship.  However, those programs have not acted to stimulate discretionary spending due to uncertainty about the future of the pandemic, said U-M economist Richard Curtin, director of the surveys.

The impact of steep price discounting and low interest rates have helped to improve buying plans but have been offset by continued high levels of job and income uncertainty, he said.

“After the record economic plunge and staggering surge in unemployment, it is not surprising that consumers expected both to improve,” Curtin said. “Consumers quickly added that the economy and labor markets would remain distressed, but would notch some gains in late 2020 and early 2021.”

“The May gain does not signal a cyclical low since the pandemic is hardly over and still represents the dominant risk. Moreover, the recession’s severity means that many jobs and firms will never reemerge,” Curtin added.

The proportion reporting improved finances in the May survey was 20 percentage points below the February reading. The falloff was due to declines in net income gains, reported by just 10% of all consumers in May, down from 32% three months ago, Curtin said.

Expected income gains during the year ahead fell to just 0.5% in May from 2.2% three months ago. Surprisingly, the largest declines were reported by those with incomes in the top third.  When asked to identify the most important changes in the national economy, an all-time record number of consumers cited extraordinary increases in the unemployment rate.

The Consumer Sentiment Index was 72.3 in the May 2020 survey, just above last month’s 71.8 but well below last year’s 100.0. The Expectations Index fell to 65.9 in May from 70.1 in April and 93.5 in last May’s survey. The Current Conditions Index was 82.3 in May 2020, up from 74.3 in April, but significantly below last May’s 110.0.

Source: University of Michigan News