- Are you better or worse off financially than you were a year ago?
- Will the year to come be better or worse for you financially?
- How will business in the US fare over the next year?
- Over the next five years, will the country experience good economic times or widespread unemployment and depression?
- Is this a good time or a bad time to make a major household purchase?
Twice a month, the University of Michigan Survey Research Center calls up a few hundred households to ask these and similar questions. The researchers compile the results into a survey that is taken very seriously on Wall Street. Not that anyone thinks that ordinary Americans really know what’s going to happen to the economy over the next year, let alone five years. The theory is that consumers spending will be driven by what consumers believe will happen, turning the Consumer Sentiment Survey into a self-fulfilling prophecy.
The initial May survey was released today and, if it’s an accurate reflection of most Americans view the economy, we are in for hard times. The overall index dropped to the lowest level since 1980. People feel worse about the economy now than they did when the stock market crashed in 1987, when the dot.com bubble burst, or even after 9/11. One reason is that inflation, driven by rising food and gas prices, has become a major worry. Consumers expect the inflation rate to rise to 5.2% over the coming year. This is the highest reading since May 1981, when actual inflation was close to 10%. (It’s 4% today.) This is worrisome because many economists, including Federal Reserve Chairman Bernanke believe that the expectation of inflation is one of the main drivers of actual inflation.
On balance, today’s Consumer Sentiment Index is a portent of continuing economic weakness, but it will likely reinforce the Fed’s growing resolve to stop easing credit conditions for fear of reigniting inflation.