US Consumer Sentiment index up in December; signs of “emerging wage-price spiral”

Summary: US consumer confidence improves slightly in December; University of Michigan index above consensus figure; views of present conditions, future conditions both improve; large disparity between top and bottom income groups reminiscent of 1980; income expectations similar to 1981, emerging wage-price spiral “could propel inflation higher”.

US consumer confidence started 2020 at an elevated level but, after a few months, surveys began to reflect a growing unease with the global spread of COVID-19 and its reach into the US. Household confidence plunged in April 2020 and then recovered in a haphazard fashion, generally fluctuating at below-average levels according to the University of Michigan. The University’s measure of confidence had recovered back to the long-term average by April 2021 but then plunged again in the September quarter.

The latest survey conducted by the University indicates confidence among US households improved slightly on average in December. The preliminary reading of the Index of Consumer Sentiment registered 70.4, above the generally expected figure of 68.0 and November’s final figure of 67.4. Consumers’ views of current conditions and expectations regarding future conditions both improved in comparison to those held at the time of the November survey.

The report was released on the same day as November’s consumer price index and US Treasury bond yields generally declined on the day. By the close of business, the 2-year Treasury yields had shed 3bps to 0.66%, the 10-year yield had lost 2bps to 1.48% while the 30-year yield finished unchanged at 1.88%.

 “The more interesting result was the large disparity between monthly gain among households with incomes in the lowest third of the income distribution compared with the modest losses among households in the middle and top third,” said the University’s Surveys of Consumers chief economist, Richard Curtin. He noted the last time such a large gap had been present was in 1980 when households in the lowest income bracket had signalled the end of the first part of the double-dip recession which occurred through 1980 to 1982.

Curtin also compared current expectations of income gains of 2.9% by people in this lowest income category with similar expectations from 1981, coming to the conclusion “an emerging wage-price spiral that could propel inflation higher in the years ahead.” 76% of all respondents choose inflation over employment as the more serious problem facing the US.

More-confident households are generally inclined to spend more and save less; some increase in household spending could be expected to follow. As private consumption expenditures account for a majority of GDP in advanced economies, a higher rate of household spending growth would flow through to higher GDP growth if other GDP components did not compensate.


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