Consumer Sentiment in the Dumps

Financial FAQs

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MarketWatch

Consumer sentiment is plunging.  And why not? With an additional 6.6 million initial unemployment compensation claims this week, it brings the total in just the past three weeks to 16.8 million since the COVID-19 national lockdown of businesses and stay-in-home orders, according to the Labor Department.

It has already pushed the revised March unemployment rate to 5.4 percent, but it could easily top 10 percent in future months if unemployment claims rise to +20 million, say economists. That would top numbers for the Great Recession.

The University of Michigan preliminary April sentiment survey sank to a 7-year low of 71.0. The current conditions component bore the brunt of the deterioration, falling 31 points to 72.4.  Expectations posted a smaller decline, with that index falling just ten points, albeit to a lower level of 70.0.  The record low for the monthly Michigan headline index is 51.7, set 40 years ago, and that could be repeated.

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U.ofMichigan

“Consumer sentiment plunged 18.1 Index-points in early April, the largest monthly decline ever recorded,” said surveys chief economist Richard Curtin. “When combined with last month’s decline, the two-month drop of 30.0 Index-points was 50% larger than the prior record. Of the two Index components, the Current Conditions Index plunged by 31.3 Index-points, nearly twice the prior record decline of 16.6 points set in October 2008.”

This is serious for a number of reasons. It affects consumer spending, the main engine of economic growth, but we also can’t ignore the psychological effects of such a worldwide pandemic, which Nobel laureate economist Robert Shiller labels a second anxiety pandemic that causes irrational behaviors—both financially and personally—in a prolonged business shutdown.

“It is not good news when two pandemics are at work simultaneously,” he said in a recent Project-Syndicate column. “One can feed the other. Business closures, soaring unemployment, and loss of income fuel financial anxiety, which may, in turn, deter people, desperate for work, from taking adequate precautions against the spread of the disease.”

An anxiety pandemic can cause a deeper recession, as consumers save more and spend less over a longer period as well. Starbucks is already reporting a drop in same-store coffee sales of 60-70 percent, reports MarketWatch. Its only business during the lockdown is takeout or drive-thru pickups, which might become even more prevalent during and after lifting of the lockdown if such changes in consumer behavior become permanent.

Such a jarring economic disruption—even if it doesn’t rise to the level of a Great Depression or Recession—has to cause permanent changes in behavior.

The loss of consumer confidence can be deadly to any recovery. We already know about the mounting Deaths of Despair with the rise in drug addiction, alcoholism, suicides among the long term unemployed, and can only hope this ‘medically induced’ work stoppage isn’t prolonged.

Harlan Green © 2020

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

About populareconomicsblog

Harlan Green is editor/publisher of PopularEconomics.com, and content provider of 3 weekly columns to various blogs--Popular Economics Weekly and The Huffington Post
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