Consumer sentiment was essentially unchanged in October, inching up just 1.3 index points above September.

Following the notable improvement in August, sentiment remained low by historic standards as consumers continued to voice concerns about inflation. Buying conditions for durables surged 23% on the basis of easing prices and supply constraints. However, year-ahead expected business conditions declined by 19%, indicating that consumers believe the economy will worsen before it improves.

“Overall sentiment remains low by historical standards and remains consistent with a recession to come,” said U-M economist Joanne Hsu, director of the surveys. “Continued declines in sentiment for higher-income consumers is worrisome given how much consumption spending they drive, and their dismal views are unlikely to abate given ongoing turbulence in financial markets.”
Sentiment deteriorates for higher-income consumers

The fact that sentiment is little changed obscures patterns by income that diverged in unusual ways in October. Typically, higher-income consumers report higher levels of sentiment than lower-income consumers. However, the current data show that for higher-income consumers, sentiment continued declining in recent months and is now even worse than that of their lower-income counterparts.

Recent tumult in financial markets weighed on higher-income consumers, with 17% spontaneously mentioning declining asset values as a negative influence on their personal finances, the highest share in 5 months. Their expectations over their own incomes and their personal finances more generally in the year ahead both deteriorated considerably this month as well.

Higher-income consumers also expressed worsening outlooks for business conditions, over both the short and long term, and labor markets. With the simultaneous impacts of falling stock values and rising prices, higher income consumers appear increasingly worried about the prospect of an economic downturn.

Sentiment improves for lower-income consumers

Despite the recent uptick in gas prices, sentiment among lower-income consumers reached its most favorable reading in 10 months. This improvement was driven primarily by higher current incomes and reflects strength in the labor market, particularly in segments with low-wage workers. Relative to September, lower-income consumers also reported more favorable expectations for their future incomes and personal finances in the year ahead.

Lower-income consumers’ outlooks for the macroeconomy in the short and long run also both improved notably over last month; many have taken note that supply problems appear to be easing. However, given their vulnerability in an economic downturn, confidence in their financial situations could quickly reverse.

Consumer Sentiment Index

The Consumer Sentiment Index rose to 59.9 in the October 2022 survey, up from 58.6 in September and below last October’s 71.7. The Current Index rose to 65.6, up from 59.7 in September and below last October’s 77.7. The Expectations Index fell to 56.2, down from 58 in September and below last October’s 67.9.

Consumer sentiment confirmed the preliminary reading earlier this month, inching up just 1.3 index points from September. With sentiment sitting only 10 index points above the all-time low reached in June, the recent news of a slowdown in consumer spending in the third quarter comes as no surprise. This month, buying conditions for durables surged 23% on the basis of easing prices and supply constraints. However, year-ahead expected business conditions worsened 19%. These divergent patterns reflect substantial uncertainty over inflation, policy responses, and developments worldwide, and consumer views are consistent with a recession ahead in the economy. While lower-income consumers reported sizable gains in overall sentiment, consumers with considerable stock market and housing wealth exhibited notable declines in sentiment, weighed down by tumult in those markets. Given consumers' ongoing unease over the economy, most notably this month among higher-income consumers, any continued weakening in incomes or wealth could lead to further pullbacks in spending that would reinforce other risks of recession.

The median expected year-ahead inflation rate rose to 5.0%, with increases reported across age, income, and education. Last month, long run inflation expectations fell below the narrow 2.9-3.1% range for the first time since July 2021, but since then expectations have reverted to 2.9%. Uncertainty over inflation expectations remains elevated, indicating that inflation expectations are likely to remain unstable in the months ahead.