February 7, 2025
The preliminary estimate of consumer sentiment for February fell 3.3 points to 67.8 after declining 2.9 points in January. The January level is the lowest since July of last year.
Surveys of Consumers Director Joanne Hsu said, “Consumer sentiment fell for the second straight month, dropping about 5% to reach its lowest reading since July 2024. The decrease was pervasive, with Republicans, Independents, and Democrats all posting sentiment declines from January, along with consumers across age and wealth groups. Furthermore, all five index components deteriorated this month, led by a 12% slide in buying conditions for durables, in part due to a perception that it may be too late to avoid the negative impact of tariff policy. Expectations for personal finances sank about 6% from last month, again seen across all political affiliations, reaching its lowest value since October 2023. Many consumers appear worried that high inflation will return within the next year. Interviews for this release concluded on February 4.,”
She added that, “Year-ahead inflation expectations jumped up from 3.3% last month to 4.3% this month, the highest reading since November 2023 and marking two consecutive months of unusually large increases. This is only the fifth time in 14 years we have seen such a large one-month rise (one percentage point or more) in year-ahead inflation expectations. The current reading is now well above the 2.3-3.0% range seen in the two years prior to the pandemic. Long-run inflation expectations ticked up from 3.2% last month to 3.3% this month. Long-run inflation expectations remain elevated relative to the 2.2-2.6% range seen in the two years pre-pandemic.”
While sentiment has risen in the past year it fell sharply from April 2021 through the middle of 2022. But their spending never slowed down at all during that time frame and in the past year has risen a solid 3.1%.
In February consumers worried that inflation was about to accelerate as the result of tariffs. In fact, as noted about, inflation expectations rose from 3.3% in the coming year to 4.3%. That is a huge monthly jump and is, apparently, attributable to tariffs. We actually expect inflation to edge lower in the coming year as reduced wage pressures and falling home prices keep inflation in check. A big pickup in the inflation rate seems highly unlikely. Consumers appear to be overly concerned.
The slower growth rate for inflation should allow the Fed to continue to ease. We expect the funds rate to fall from 4.8% currently to 3.8% by the end of 2025..
Both the University of Michigan’s consumer sentiment index and the Conference Board’s measure of consumer confidence both show a moderate rebound in the past couple of months. The two series can diverge from one month to the next, but the trends are similar.
GDP grew 2.3% GDP growth in Q4 and we expect to see 3.0% GDP growth in both the first quarter and for 2025 as a whole.
Consumers’ assessment of current conditions declined 5.3 points from.74.0 to 68.7.
Consumer expectations for six months from now fell 2.0 points from 69.3 to 67.3..
Stephen Slifer
NumberNomics
Charleston, SC
Going forward to the next reporting point will consumers focus on President Trump’s positive commentary for “Negative Interest Rates” and “Refinancing the US debt”
Since a lot of folks have savings accounts one would think :negative interest rates” would create negative consumer sentiment
Most people associate “refinancing” with financial difficulties
I wonder if that will have a negative on consumer sentiment
HI Allen,
Good question. But, at least in my mind, it is a moot point here in the U.S. I don’t think we will ever see negative rates but, then again, some of these other countries around the globe never thought they would get there either. If we should get to the point where negative rates become possible let’s keep an eye on confidence as you suggest. The soonest that might occur would be in the midst of the next downturn — whenever that is.
Steve
Steve
The rise in inflation and interest rates appears inevitable.
I am concerned about the effect this will have on our ability to meet our federal debt obligations.
At some point in the future will we reach a tipping point where cannot pay the interest on the debt?
Then what happens?
Hi Bill,
I have been worried about debt for some time. The path we are on seems unsustainable to me. Debt as a percent of GDP has climbed to 103%. The record was 106% right after WWII. But at that point you cut defense spending sharply and the ratio shrank quickly. This time 70% of the deficit each year is entitlements. Those will be difficult to cut and, hence, the ability to shrink the deficit to something manageable (3% of GDP) is unlikely.
Specifically, with re: to your question about inflation, inflation helps to shrink the deficit. If we get nominal GDP growth of, say, 10% (4% real growth + 6% inflation) revenue growth should be roughly 10%, Yes, interest rates will rise, and interest on the debt outstanding will climb. At the same time some government expenditures will shrink (think welfare payments, Medicaid). An easy way to resolve the budget/debt problem is some good old fashioned inflation.
While inflation may help the government, it hurts the rest of us, especially older people trying to live on a fixed income, and lower income individuals who do not get the benefits of higher home prices and higher stock market valuations.
The reality is that debt/GDP of 103% is not sustainable. If we have a problem like in 2020, when the Treasury loses tax receipts and government spending increases, the budget deficit explodes, and debt in relation to GDP takes a huge jump. Having said that, I have been worried about debt for ages and nothing bad has happened — yet. That does not suggest that we are supposed to ignore it. There will be a day of reckoning, but you and I may not be around to see it.
Steve- great information, is there any data on the distribution of consumer net worth i.e. is it even across income levels or aggregated in one or more segments? Could this explain some of the differences in consumer sentiment?
Hi George. Net worth is decidedly NOT evenly distributed. I have not looked for that information specifically, but just a quick check I found online which seems to give us a sense. It turns out that a PEW Research Center study noted that upper income families (which I guess it defines as income greater than $207,400 in 2018) held 79% of the wealth. The middle income group which I guess ranges from $28,700 in 2018 to $207,400 held 17% of the wealth, and the lower income category (less than $28.700) had 4%. The data are obviously old, but I am sure the numbers have changed not all that changed much. The bulk of that wealth comes from the stock market and home ownership. Thus, low income earners do not share much in the wealth of the country. Middle income earners have more, but still relatively little. The wealthier Americans have by far the biggest share of the pie. Thus, it seems to make sense that if you do a survey of consumer confidence, lower income earning families included in the survey are being hit hard and their confidence has plummeted. A big portion of their income goes to housing, gas, and food — all of which have risen sharply in price. They were just getting by before and now they have to make a choice — Pay the rent? Buy food for the family? Fill the car with gas?
But what bothers me the most is that the U of Michigan survey has confidence plummeting — below the 2020 low, and below the 2008-09 recession low. I am not sure that makes sense to me. The Conference Board measure of consumer confidence has it dropping, but the decline is not nearly as dramatic. So which is the better measure? The Conference Board data seem more consistent with the consumer spending data — some slowdown but not dropping off a cliff. I guess we will see.
Steve
another great article, Steve! Thanks as always
Thanks Michelle. Nice to hear from you. Hope all is well.