Consumer sentiment fell in November due to a sharp decline in economic prospects, according to the University of Michigan Surveys of Consumers.

The decline was due to the current and expected resurgence in the COVID-19 virus as well as shifts in expectations following the outcome of the presidential election, said U-M economist Richard Curtin, director of the surveys.

If coronavirus infections and deaths rise as anticipated in the months ahead, further declines in optimism are likely, he said. Half of all consumers expected conditions in the economy would still be unfavorable in 2021, including slightly higher inflation and unemployment rates.

The optimism generated by the anticipated approval of several COVID-19 vaccines may be overwhelmed by heightened concerns about vaccination priorities, especially given the expected increases in coronavirus deaths over the next several months, Curtin said.

“The resurgence of COVID infections and deaths in the months ahead is likely to promote more firm closures and stay-at-home orders in addition to mandatory wearing of face masks and social distancing,” he said. “Widespread closures are likely to exact a heavy toll on the economy and cause severe hardships for some households.

“A delay in federal aid until next year would permit great harm and permanent damage to occur for many households, firms and local governments. Immediate action by the current administration and Congress is urgently needed to secure the continuation of the economic recovery and to ensure the welfare of all households.”

Personal finances continue to weaken

Consumers’ judgments about their financial situation have remained near the lows recorded seven months ago, with net increases in household incomes only slightly higher in frequency than net declines (31% vs. 28%), the smallest margin of gains since June and July.

Expected median income gains in the year ahead have already declined to 1.6% in November, down from 2.0% last month, and further declines are likely with the resurgence of COVID-19 inflections and firm closures. Households with incomes in the top third expected larger gains (2.5%) as did younger workers (3.3%), but even among these households, income expectations have recently declined.

Prospects for consumption

Job and income declines due to the COVID-19 resurgence will diminish holiday purchases among lower-income households, especially without any renewed federal benefits, Curtin said. Even higher-income households who have larger savings balances that could support more robust spending must also deal with rising COVID-19 risks.

The exception, he said, will be the outfitting and refurnishing of homes to accommodate multiple new home-based tasks, including uses as classrooms, offices and centers for family recreation and exercise.

Consumer Sentiment Index
The Consumer Sentiment Index was 76.9 in November, down from 81.8 in October and well below last November’s 96.8. The entire decline was due to the Expectations Index, down to 70.5 in November, from last month’s 79.2 and last year’s 87.3. The Current Conditions Index rose to 87.0 in November, from last month’s 85.9 but still below last year’s 111.6.

Consumer sentiment was unchanged in late November--a difference of just 0.1 points from mid-month--although there was a significant decline in the Expectations component which was offset by more favorable assessments of current economic conditions. Importantly, the November data were less optimistic than last month due to the resurgence in covid infections and deaths as well as partisan shifts due to the outcome of the presidential election. For the first time since Trump entered office, Democrats rather than Republicans held a more optimistic economic outlook (see the chart). The steep rise in covid infections had a greater impact on Democrats as 59% of Democrats reported that the coronavirus had changed their lives to a great extent compared with just 36% among Republicans. In the months ahead, if infections and deaths rise as anticipated, further declines in optimism are likely. The anticipated declines, however, will be tempered by the approval of several vaccines by the end of the year. The approval of vaccines will heighten concerns about vaccination priorities, especially when accompanied by the expected increase in deaths in the next several months. These events are likely to promote more closures and stay-at-home orders in addition to mandatory masks and social distancing. Widespread closures would incur a heavy toll on the entire economy and cause escalating hardships among some households. A delay in federal aid until next year would allow great harm and permanent damage to occur to many firms, local governments, and households.