Consumers voiced much more positive views in April, rising 9.8% above March, according to the University of Michigan Surveys of Consumers.

Most of the surge was concentrated in expectations, with gains of 21.6% in the year-ahead outlook for the economy and an 18.3% jump in personal financial expectations, said U-M economist Richard Curtin, director of the surveys.

The cause was a sharp drop in gas price expectations, falling to just 0.4 cents from last month’s 49.6. The declines in gas prices may be reversed by ongoing developments in Ukraine, he said. The overall impact on sentiment trends, however, was quite small: Other than the last two months, the Sentiment Index in April was still lower than in any prior month in the past decade.

Curtin said the 1st quarter decline in overall GDP came as no surprise to consumers. Consumers, however, continued to modestly advance their spending by 2.7% due to a strong labor market and rising wages.

“The pandemic created a sense of uncertainty, which has only increased due to rising inflation and the growing consequences of the war in Ukraine. Just when supportive government policies are needed, consumers have lost confidence in economic policies,” he said. “Fiscal actions will increasingly be hampered by partisanship in the runup to the Congressional elections. Monetary policy aims at tempering the strong labor market and trimming wage gains are the only factors that support optimism.

“A soft landing will be difficult to achieve given the heightened uncertainties, raising prospects for a halt or a temporary reversal by the Fed. The probability of reaching a tipping point will depend on maintaining a strong labor market and robust wage gains. The cost of that renewed strength may be an accelerating wage-price spiral.”

Strong labor market and rising wages
Continuing strength in the labor market and rising wages remain the sole source of economic optimism. Consumers were more likely to anticipate additional small declines in the national unemployment rate despite its current low of 3.6%.

Anticipated wage gains remained strong, with expected gains across all households averaging 2.6%—the last time a larger increase was recorded was in March 2007. Moreover, an expected annual income gain of 5.3% was expected by those under 45, which was the highest expected wage gain since May 1990.

The growing domination of inflation
Prospects for consumers’ personal finances improved in April, reversing last month’s expected negative trends. Importantly, the gains were widely shared across income and age groups largely due to the notion that gas prices had peaked, Curtin said.

Inflation was seen as the overwhelming problem facing the nation as well as causing eroding living standards among households. Inflation was cited as the main cause of falling living standards, mentioned by 36% of all households. Although the expected rate of inflation remained unchanged from last month, the high level of prices meant that consumers faced the difficult choice of which normally purchased items to eliminate, Curtin said.

Consumer Sentiment Index
The Consumer Sentiment Index rose to 65.2 in April, up from 59.4 in March, but well below last April’s 88.3—so far, President Biden’s peak. The Expectations Index rose to 62.5 in April, up from 54.3 in March, and the Current Conditions Index rose more modestly, to 69.4 in April from 67.2 in March. Compared with a year ago, both indices lost about 25% of their value.

The Index of Consumer Sentiment rose to 65.2 in April, a jump of 9.8% above March. Most of the surge was concentrated in expectations, with gains of 21.6% in the year-ahead outlook for the economy and an 18.3% jump in personal financial expectations. The cause was a sharp drop in gas price expectations, falling to just 0.4 cents from last month's 49.6. The overall impact on sentiment trends, however, was quite small: other than the last two months, the Sentiment Index in April was still lower than in any prior month in the past decade. The 1st quarter decline in GDP was no surprise (see the chart). The downward slide in confidence represents the impact of uncertainty, which began with the pandemic and was reinforced by cross-currents, including the negative impact of inflation and higher interest rates, and the positive impact of a persistently strong labor market and rising wages. The global economy has added even more uncertainties about prospects for the U.S. economy, including the growing involvement in the military support for Ukraine, and renewed supply line disruptions from the covid crisis in China. Who would not be apprehensive about future conditions, even if on balance they anticipated a continued expansion? Moreover, consumers have lost confidence in economic policies, with fiscal actions increasingly hampered by partisanship in the runup to the Congressional elections. Monetary policy now aims at tempering the strong labor market and trimming wage gains, the only factors that now support optimism. The goal of a soft landing will be more difficult to achieve given the uncertainties that now prevail, raising prospects for a halt, or even a temporary reversal, in the Fed's interest rate policies. The probability of consumers reaching a tipping point will increasingly depend on prospects for a strong labor market and continued wage gains. The cost of that renewed strength is an accelerating wage-price spiral.