News of the coronavirus spread and worries about its impact on the economy were behind a 5.1 point decline in the University of Michigan’s preliminary March Consumer Sentiment Index to 95.9 after 101.0 in February. The early March reading was the lowest since 95.5 in October. This is the first time that news about COVID-19 had a visible impact on consumer sentiment. It was more concerns that a pandemic would hurt future conditions than that there were immediate signs of a downturn. The current conditions component was down 2.3 points to 112.5 in March, the lowest since 108.5 in September 2019 when there was more uncertainty about the labor market when the manufacturing sector was in the early days of a mild recession. The index for six-month expectations — which is about 60% of the headline index — was down 6.8 points to 85.3 in March, its lowest since 84.2 in October when not only was the slowing in manufacturing more entrenched, prospects for a trade agreement with China seemed less certain.
The index level is not a bad one in the historical context. Consumers are still relatively optimistic. The report says that the perception of the pandemic as a “temporary event” are helping keep confidence from deteriorating. The labor market still looks good, if with a few cracks around the edges. Interest rates are low, especially for home mortgages. And if steep declines in oil prices have their negatives, for consumers low prices at the gas pump and for home energy costs usually result in lifting confidence. In the short term, consumer spending is likely to hold up, if shifted to some spending on emergency preparations and supplies for a period of home confinement. However, they are worried that widespread closures at public venues and services will have a lasting negative effect on the economy.
Inflation expectations in March were down a tenth to 2.3% for the 1-year measure and unchanged at 2.3% for 5-year expectations. Inflation expectations continue to hover at the low end of the range, in line with recent sharp declines in energy costs. Whether inflation expectations are in danger of coming unanchored will not be the first concern of Fed policymakers when they meet next week on March 17-18 to consider monetary policy. However, the present readings are low, but still within the bounds of what policymakers can accept.
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