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First Cut: Final March Consumer Sentiment Index lowest since late 2016 and has fourth largest month-over-month decline

The final reading of the University of Michigan Consumer Sentiment Index for March fell to 89.1 (previously 95.9) from 101.0 in February. It was the lowest since 87.2 in October 2016. The index was at 89.8 in August 2019 when fears of a recession were prominent. The report said the 11.9 month-to-month drop was the fourth largest. The sudden decline is consistent with periods in which there threats to the outlook emerge quickly and dramatically.

Readings are not actually bad when compared with most of the recovery since the end of the recession in 2009. However, this new crisis is likely to introduce greater caution going forward even if the economy rebounds quickly from current challenges. Consumers will close their wallets for discretionary purchases — especially larger ones — until it is clear the danger is past and things are back on track.

Consumers reacted to the downturn in the labor market with an 11.1 point decline to 103.7 in March (previously 112.5). Even gasoline prices at their lowest since late 2016 and affordable mortgage rates did not cheer up consumers. The spread of COVID-19 and the measures taken to control it have caused consumers’ optimism to rapidly retreat.

The index for six-month expectations — which accounts for about 60% of the total — fell 12.4 points to 79.7 (previously 83.3) with intensifying worries about a deep recession and loss of gains in job security and income.

Along with declines in energy costs, 1-year inflation expectations fell to a near-term low of 2.2%. The 5-year inflation expectations measure remained at 2.3%, low but not unanchored.

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