Consumer sentiment fell in January to its lowest level since Donald Trump was elected, according to the latest University of Michigan Surveys of Consumers.

The decline was due to consumers’ assessments about how the partial government shutdown had impacted economic conditions. The temporary end of the shutdown had only a small positive impact since the basic issues have not been resolved, only postponed, said U-M economist Richard Curtin, director of the surveys.

The impact of the shutdown on consumer expectations was selective, mainly influencing the outlook for the overall economy, he said. Personal financial prospects were largely unaffected, remaining at quite positive levels.

The primary concern of consumers was that a slower pace of economic growth would ultimately lessen new job creation. Favorable job and income prospects are essential to maintain consumer spending at levels that will support the continued expansion of the economy, Curtin said.

“The typical impact of such ‘crisis’ events as the shutdown is short lived, with consumers quickly regaining lost confidence. That is unlikely to occur this time as the deadline for resolution has only been extended until mid February,” he said. “If the standoff continues into late February, it could foster sustained declines in economic optimism among consumers.

“Even small spending cutbacks, occurring simultaneously across the majority of consumers, could push the economy into a recessionary downturn. There is still time to avoid a sustained decline in confidence, but this would require an end to the standoff that has begun to damage consumer confidence and diminish spending prospects.”

Current Finances Remain Strong
Half of all consumers in the January survey reported an improved financial situation as they have throughout the past year. Higher nominal incomes were mentioned by 40 percent in January just below the 2018 average of 42 percent.

When asked about income increases expected for 2019, a gain of 2.2 percent was anticipated in the January survey, a level nearly identical to the average recorded during 2018.

Job Prospects Weaken
The current state of the national economy was judged to have significantly weakened in January due to the shutdown. Whereas in December, twice as many consumers judged the economy to have improved as worsened, in the January survey, equal proportions thought the economy had worsened as improved (43 percent).

And when asked about prospects for the year ahead, more consumers anticipated the economy to worsen than to improve, and this weakness was related to less positive job prospects. Just 19 percent anticipated lower unemployment in the year ahead, the lowest figure since mid-2016, while 33 percent expected increases. The continuation of the current expansion into an all-time record length crucially depends on consumers maintaining favorable income and job prospects.

Consumer Sentiment Index
The Consumer Sentiment Index was 91.2 in the January 2019 survey, down from 98.3 in December and 95.7 in last January’s survey. The government shutdown was responsible for the overall decline. The Expectations Index fell to 79.9, down from 87.0 in December and the Current Economic Conditions Index fell to 108.8 from 116.1 in December, both falling to their lowest levels since Trump was elected.

Consumer sentiment remained at month-end at its lowest level since Trump was elected. The end of the shutdown caused only a modest boost in the Sentiment Index. The typical impact of such "crisis" events is short lived, with consumers quickly regaining lost confidence. That is unlikely to occur this time as the deadline for resolution has only been extended until mid February. If the standoff continues into late February, it could foster sustained declines in economic optimism among consumers. Even small spending cutbacks, occurring simultaneously across the majority of consumers, could push the economy into a recessionary downturn. Each proponent in the shutdown debate appears to put more weight on the political rather than on the economic implications of their actions. Continued strength in consumer spending is essential, especially given the volatile financial markets and weakened global growth prospects. It is of some importance to note that consumers still viewed their financial prospects quite positively (see the chart). Nonetheless, consumers were not as optimistic about future job gains, which was a consequence of the expected weakening of the economy due to the shutdown. Those losses could be sustained if the shutdown crisis lingers past mid February. There is still time to avoid a sustained decline in confidence, but it would require an end to the standoff. Indeed, if the current level of confidence is maintained, it would be consistent with a 2.6% growth in consumer spending in 2019.