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The Conference Board Consumer Confidence Survey and the University of Michigan Consumer Sentiment Survey are two closely watched reports on the US consumer. Domestic consumption accounts for about two-thirds of the US economy, so insights into consumer attitudes can predict changes in the business cycle. The latest reports from the Michigan Survey and the Conference Board showed that the surveys have started to diverge in recent months. In this report, we explain why this gap exists and what these surveys tell us about the economy.
As the chart above shows, the University of Michigan survey fell much faster than the Conference Board report. The discrepancy between the surveys is driven by differing views on how consumers view the current state of the economy. Over time, the two surveys have tended to evolve in parallel; thus, the recent divergence is interesting. Although it is not clear why these differences exist, we suspect that they may be related to the questions asked in each survey. The Conference Board survey focuses on general questions about business conditions and employment, while the Michigan survey focuses on a wider variety of issues ranging from inflation and the current state of the economy. economy to spending habits and return on investment. Therefore, the optimism of the Conference Board survey may reflect consumer views on the labor market, and the pessimism of the University of Michigan survey may reveal inflation-related issues.
Both surveys include a component on the current situation and a component on future expectations. Despite the differences in the short-term outlook, both surveys indicate that consumers are increasingly jaded about the future of the economy. We suspect that the deterioration in the economic outlook was largely due to inflation fears. In recent months, rising inflation has caused consumers to change their budgeting habits and, in some cases, to reduce their real consumption. After adjusting for inflation, retail sales in March fell, on an annual basis, for the first time since June 2020. Although it is tempting to argue that a decline in consumption prospects can lead to a decline in overall consumption, our research suggests that there does not appear to be a strong relationship between the two variables; the March report could be an outlier. That being said, we found that consumer expectations drive whether young adults, people under 40, decide to take out a loan to buy a home. Our model suggests that consumer expectations and single-family housing starts explain about 70% of the variation in the annual change in residential mortgages for these young adults. The model predicts that as consumer expectations fade, young adults are likely to be more reluctant to take out loans to buy homes. If our model is correct, the rise in house prices could slow by the end of the year.
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