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Quick Fix
Consumer sentiment has nosedived over the past month as Americans feel the pinch from surging prices on everything from gasoline to ground beef.
What can the shift tell us about the broader economy? It’s complicated.
The University of Michigan’s consumer sentiment index, a monthly survey that measures people’s perceptions of current and future economic conditions, hit 66.8 on Friday, its lowest level in a decade. The numbers stunned economists, who had expected the reading to rise slightly to 72.
“It is simply mind-boggling that household attitudes are darker today than they were in April 2020,” said Amherst Pierpont chief economist Stephen Stanley in a note to clients.
Rising prices for homes, vehicles and household durable goods were cited more frequently than at any other time in more than 50 years, Stanley noted — even during the period in the early 1980s when inflation was running well above 10 percent. “Despite strong growth and a vibrant labor market, inflation is outweighing all of the positives,” he added.
What’s happening? Survey director Richard Curtin attributed the drop to “the growing belief among consumers that no effective policies have yet been developed to reduce the damage from surging inflation.” But Curtin also emphasized the enormous gulf between consumers of different political affiliations, and how those perceptions tend to flip based on which party is in the White House.
In October 2020, just before the presidential election, the sentiment index for Republican consumers was 98, compared with 72.4 for Democrats. That shifted dramatically after Joe Biden took office. While attitudes slumped among both parties last month, the drop was much steeper for Republican consumers, plunging 17 points to 37.2, compared with a 5.3-point decline for Democrats, to 87.
“Partisans aligned with the president's party have adopted very positive moods, and those in the opposing camp very negative moods,” Curtin said. “As a result, partisan supporters of one or the other presidents either mentioned or ignored rising home and stock values, inflation and income growth rates, or mentioned or ignored employment or unemployment rates.”
“The partisan differences in perceptions were not minor, but were large and equal in size,” Curtin noted.
Why does it matter? This is especially important now because inflation, in particular, depends on what people expect it to be in the future.
Republicans have been hammering Democrats for months over what they say is dangerous, runaway inflation, and they’re set to make higher prices a centerpiece of their campaign to take back the House and Senate next year.
Meanwhile, the White House is trying to assure Americans that its infrastructure and social spending programs will help relieve price pressures next year — despite skepticism from even White House economist allies that the plans will do anything to stem inflation in the near-term.
“There's no doubt inflation is high right now. It's affecting Americans' pocketbooks. It's affecting their outlook,” National Economic Council Director Brian Deese said on NBC's “Meet the Press” Sunday. “But it's important that we put this in context. When the president took office, we were facing an all-out economic crisis.”
For Biden, the bad news is that a large portion of the population likely won’t give him credit even if inflation does subside, since their sentiment is being driven at least as much by politics as data. That likely means nothing less than a solid rebound in the recovery can turn the issue in his favor.
IT’S MONDAY — Congress is back in session this week and we’ve got loads to track: Fed nominations, BBB, OCC … oh my! Did we miss something? Let us know: Email us at [email protected], [email protected], or on Twitter @katedavidson.
DRIVING THE WEEK
House Financial Services Committee marks up legislation on special purpose acquisition companies (SPACs) Tuesday …House Ways and Means oversight subcommittee holds a hearing on opportunity zones Tuesday … Census Bureau releases retail sales data Tuesday … Federal Reserve Bank of New York holds its U.S. Treasury Market Conference Wednesday.
Fed Governor Chris Waller speaks on stablecoins at the Cleveland Fed’s financial stability conference Wednesday … Joint Economic Committee holds a hearing on demystifying cryptocurrency Wednesday … Senate Banking Committee confirmation hearing for Saule Omarova to be Comptroller of the Currency Thursday … Cato Institute holds its annual monetary policy conference Thursday … Fed Vice Chair Richard Clarida speaks on monetary policy coordination Friday … Fed’s Waller speaks again Friday on the economic outlook.
THE RECONCILIATION SLOG CONTINUES — Biden’s $1 trillion-plus social spending plan will probably have to wait several weeks to hit the Senate floor, our Burgess Everett reports.
“With Congress reconvening Monday and the House still working to pass the massive climate, safety net and tax package, the Senate will likely turn instead this week to the annual defense policy bill, Senate Majority Leader Chuck Schumer said Sunday. That’s because even if the House passes the so-called budget reconciliation bill this week, there’s still work to do to ready the legislation for the Senate floor.”
MM debt limit sidebar: Schumer also said in a letter Sunday the Senate may also have to tackle debt limit legislation “pending further information on the X date.” Remember, we at MM warned you a couple of weeks ago that the deadline for raising the debt limit depended in part on enactment of the infrastructure bill, which would trigger a large transfer of funds from the Treasury to the Highway Trust Fund, shrinking the government’s cash buffer.
Biden is set to sign the infrastructure measure today, but Treasury officials still haven’t said when they intend to transfer the funds, or how that will affect their ability to keep paying the bills on time. Treasury Secretary Janet Yellen said last month she has a high degree of confidence the government can keep making on-time payments through Dec. 3.
We’d bet on another letter from Yellen to Congress soon (possibly this week) providing more clarity, including when the Treasury may exhaust its emergency measures, i.e. when there’s a real risk of a U.S. debt default.
CFPB SUES PAWN SHOP GIANT FIRSTCASH — Our Katy O’Donnell: “The CFPB on Friday charged international pawn shop operator FirstCash with allegedly imposing illegal interest rates on active-duty service members and their families, including loans with rates that exceeded 200 percent. The CFPB sued FirstCash and subsidiary Cash America West in a federal court in Texas for violating the Military Lending Act, which has a 36 percent annual rate cap. The agency said the companies exceeded the limit with 3,600 loans in Arizona, Nevada, Utah and Washington.”
SEC REJECTS BITCOIN FUND PROPOSAL — Our Zachary Warmbrodt: “The SEC on Friday denied an application for a Bitcoin investment fund, in a move that underscored the agency's continuing concerns about the cryptocurrency market. The exchange-traded fund proposed by asset manager VanEck would have offered shares in assets consisting of Bitcoin. It would have given investors more direct exposure to the digital currency than Bitcoin futures ETFs that the SEC allowed to start trading last month.”
COURT EXTENDS STAY OF BIDEN VACCINE MANDATE — From our Rebecca Rainey: “A Louisiana-based federal appeals court on Friday extended a stay against the Biden administration’s vaccine-or-test requirement for private businesses, finding that the states and businesses challenging the rule “show a great likelihood of success on the merits.” “A stay is firmly in the public interest. From economic uncertainty to workplace strife, the mere specter of the Mandate has contributed to untold economic upheaval in recent months,” wrote Fifth Circuit Judge Kurt Engelhardt.
BIDEN-XI VIRTUAL SUMMIT SET FOR TONIGHT — From our Doug Palmer: “A much-anticipated virtual summit between President Joe Biden and Chinese leader Xi Jinping will take place on Monday evening, the White House confirmed. The summit presents the biggest opportunity yet to reset the increasingly fraught bilateral relationship.”
FED WATCH HEATS UP THIS WEEK — The president could announce his choice for the next Fed chair any day.
—While Governor Lael Brainard is viewed as more dovish than Chair Jerome Powell, Bloomberg’s Craig Torres notes, “There is no direct evidence that Brainard, 59, can’t be tough on inflation.”
“History shows that Democratic nominees can sometimes be more hawkish than GOP ones, as was the case with Governor Laurence Meyer, who served with the Republican Fed chief Alan Greenspan. And Paul Volcker, the Democratic chair who whipped inflation in the 1980s, was the most famous hawk in Fed annals.” Brainard is a big supporter of the Fed’s new framework, which calls for keeping rates low until the central bank reaches its maximum employment goal.
FIRST LOOK: REPUBLICAN PRINCIPLES ON CENTRAL BANK DIGITAL CURRENCY — Ahead of the Fed’s pending report on the prospects of a central bank digital currency, House Financial Services Committee Republicans have released a set of principles they say should guide the discussion. Among their priorities: maintaining the dollar as the world’s reserve currency and the status of the U.S. payment system; not impeding ongoing development of stablecoins; promoting private sector innovation; and addressing privacy and security protections.
BOOK CLUB: BLOOMBERG’S FAUX IS WRITING A BITCOIN BOOK — Bloomberg Businessweek writer Zeke Faux has signed a book deal with Crown Publishing Group to write “Untethered,” “an investigation into the murky financial machinery behind the cryptocurrency explosion and the larger-than-life personalities who are upending the world of money.” From Publishers Marketplace: Faux’s investigation is “centering on the startup Tether, the de facto bank of the crypto world, and the $69 billion supposedly backing Tether's ‘stablecoin’ and whether it has vanished into thin air.”
SLOW RETURN OF PRIME-AGE WORKERS THREATENS RECOVERY — WSJ’s Sarah Chaney Cambon: “By many measures, the job market is strong. Payrolls are growing solidly, job openings are near records and wages are climbing at a brisk clip. One factor, though, continues to bedevil prospects for a smooth labor-market recovery: The share of people working or looking for a job has stagnated in recent months.”
Fly Around
UKRAINE WANTS TO BE CRYPTO CAPITAL OF THE WORLD — NYT’s David Segal and Ivan Nechepurenko: “The anything-goes ethos has dogged Ukraine for years, and now the government is hoping to bury it, with an assist from cryptocurrency. In early September, the Parliament here passed a law legalizing and regulating Bitcoin, step one in an ambitious campaign to both mainstream the nation’s thriving trade in crypto and to rebrand the entire country.”
MORGAN STANLEY ECONOMISTS SEE 2023 FED HIKE — Bloomberg’s Simon Kennedy: “Morgan Stanley economists are sticking with their prediction that the Federal Reserve won’t raise interest rates until 2023, breaking ranks with their own chief executive officer. In an outlook released on Sunday, strategist Andrew Sheets said his colleagues in the bank’s economics team reckon the U.S. central bank will end its asset purchases by the middle of next year, but won’t raise its benchmark rate from near zero until early 2023.”
WHAT’S DRIVING XI JINPING’S ECONOMIC REVAMP? — WSJ’s Stella Yifan Xie: “China’s extraordinary economic rise planted a belief in the country that just about anyone can succeed if they work hard—a key component of Xi Jinping’s ‘China Dream.’ For more and more Chinese, however, that is no longer true. Academic research and data show that as China’s economy matures, more of the best opportunities have been accruing to the children of wealthy and politically connected elites.”
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