University of Michigan Index of Consumer Sentiment Posts Sharp Declines in Final August Results

The University of Michigan today (Friday 8-27-21) released its final Consumer Sentiment Index (CSI) for August. The Index of Consumer Sentiment dropped to a reading of 70.3 in August, down from 81.2 in July, a month-over-month decline of -13.4% and -5.1% year-over-year (74.1 in August 2020). The Current Economic Conditions dropped to a reading of 78.5 in August, down from 84.5 in July, a month-over-month decline of -7.1% and -5.3% year-over-year (82.9 in August 2020). Finally, the Index of Consumer Expectations dropped to a reading of 65.1 in August, down from 79.2 in July, a month-over-month decline of -17.6% and -5.0% year-over-year (68.5 in August 2020).

In remarks prepared for the preliminary release of the August CSI, Richard Curtain. Director of Surveys for the UofM said, “There was no lessening in late August in the extent of the collapse in consumer sentiment recorded in the first half of the month.”

The Consumer Sentiment Index fell by 13.4% from July, recording the least favorable economic prospects in more than a decade. The Sentiment Index has only recorded larger losses in six other monthly surveys since 1978. The losses were especially large in the Expectations Index, and widespread across all demographic groups, regions, and the outlook for the economy. Personal financial prospects continued to worsen due to smaller income gains amid higher inflationary trends. Consumers’ extreme reactions were due to the surging Delta variant, higher inflation, slower wage growth, and smaller declines in unemployment. The extraordinary falloff in sentiment also reflects an emotional response, from dashed hopes that the pandemic would soon end, and lives could return to normal.

The August collapse of confidence does not imply an imminent downturn in the economy. There was a similar episode which occurred in September 2005, with comparable declines in the Sentiment Index (13.7% in 2005 vs. 13.4% in 2021). The cause of the steep falloff in 2005 was the devastation from hurricane Katrina and rising energy prices. The impact of 9/11 was another non-economic event that had an immediate impact on consumers’ expectations and emotions. Although economic expectations began to improve by year-end, the emotional impact on spending patterns lasted for a much longer time. That same type of persistent impact on spending patterns is now likely to reoccur.