EmailThe preliminary reading of the August University of Michigan Consumer Sentiment Index fell to its lowest point since April 1980. The index dropped from 63.7 in July to 54.9 in August. The Briefing.com consensus expected the index to fall to 62.5.
The expectations index fell from 56.0 in July to 45.7 in August. That was worse than every reading during the Great Recession. The current conditions index declined from 75.7 in July to 69.3 in August.
Blame partisan politics in Congress and the debt ceiling fiasco for the massive drop.
Normally, consumer sentiment correlates with equity prices, employment, media reports, and oil/gasoline prices. Over the last several weeks, the media has focused on the ineptitude of Congress to pass a debt ceiling increase. The consumer got a high dose of reality about the true size of debt problem, the incompetence of Congress to compromise on a methodology to alleviate the problem, and the prolonged economic weakness that could come from high debt loads. It is no wonder that consumer sentiment plunged to historic lows.
Furthermore, the BEA announced in the second quarter GDP report that the recession was deeper than originally thought and the recovery much more sluggish. The bad news only worsened consumers' feelings about the economic situation.
Thankfully, sentiment is an extremely poor indicator for consumption growth. Consumption is reliant upon income growth. As long as the employment situation improves, consumption will grow with it regardless of the sentiment reading.
