Consumer Expectations Sour in Fed Survey

Economic Report Monitor #9
April 6th, 2020

A quiet day in economic reporting makes way for a week that US leadership says could be the "hardest, saddest" week of some Americans' lives. With the COVID-19 outbreak expected to peak, the aim continues to be to reduce the mortality rate as new case growth rates finally start to subside. Wall Street seemed to share that optimism as stocks rose on the day with all three indexes in the green. However, uncertainty remains in a lot of facets of life whether it be investors in the market or consumers in lockdown.

The Federal Reserve's March edition of the Survey of Consumer Expectations provided some insight into the initial economic impact on Main Street. Most individuals didn't see a major change in inflation over the next 12 months with the median expected value at 2.5%. However, there was more fluctuation in responses that featured lower low estimates and higher high estimates. Home price and gas price expectations, things which are probably more readily visible to consumers, saw sharper drops. Home prices were down from 2.8% to 1.3%, and gas prices dropped from 3.1% to 2.5%. Things in high demand, food and healthcare, saw increases in expected price growth 4.0% to 4.6% and 5.8% to 7.5% respectively.

With the lockdown shutting down businesses, consumers were sourer about the labor market as well. In February, 34.2% of responses saw higher unemployment one year out, and in March, that value jumped to 50.9%. As expected, responses for the expected probability of losing one's job increased by 4.7% to 18.5% and was "particularly pronounced for college graduates". It's interesting that some of these numbers weren't higher given the labor market indicators that have already been reported, but that could be due to a mixed sample size in the Fed survey. In jobless claims and employment situation data, certain non-essential industries are isolated with large job losses for the time being. Cash flows will be wiped out for a lot of businesses that are trying to avoid mass layoffs, so the unemployment expectations could worsen more as the lockdown is prolonged and those liquidity issues emerge.

Regardless of employment status, households see a sharp drop in income growth expectations from  3.0% in February to 2.1% March. Household spending fell in lockstep with income from 3.2% to 2.3%. Credit availability is starting to deteriorate for consumers in March and are expected to continue deteriorating in the future with both indexes rising about 10% to 32.1% and 38.8% respectively. The average perceived probability of missing a debt payment increased to 15.1%, well above the 12-month trailing average, but nothing that screams crisis. These levels of delinquency expectations have been seen before in near-term peaks in 2017 (14.9%) and 2013 (17.2%). Like the labor market though, it's like this value could worsen as cash flow problems emerge. Overall, households in their current situations and their expectations feel much worse off, with 15% jumps in the responses of household financial situations being "much worse off" and "somewhat worse off" data consistent with the University of Michigan's consumer sentiment numbers. 

With March being the month that will be known for all the madness, consumer's initial reactions aren't terribly bad. The responses often mirror data seen in 2013 and 2017 which were much less tumultuous times than these. Of course, a concern regarding this survey is when exactly participants responded since the first half of March felt distinctly different from the last half of March. April consumer data would definitely be more telling of the effects on Main Street USA since households will have more time to digest the lockdowns and let the financial stress build. Since the stimulus package has yet to really be deployed, this will also be a litmus test of the policy's efficiency and urgency.