The University of Michigan sentiment index has plunged to record lows as inflation fears hit new highs. However, the Conference Board measure paints a very different picture – what you ask and how you weight responses can yield very different responses and it is important to remember that what people say and what people do can be very different .
Sentiment plunge highlights the fears of stagflation
We have had an absolutely awful University of Michigan sentiment index. The overall balance in June dropped to a record low of 50.2 from 58.4 rather than dip to 58.1 as the market had been expecting. Both the expectations index (46.8 from 55.2) and the current conditions (55.4 from 63.3) plunged while the 1Y inflation expectations ticked up from 5.3% to 5.4% and 5-10Y inflation expectations jumped from 3% to 3.3%.
On the face of it this is the worst possible combination for the Federal Reserve as it suggests households are really fearing stagflation. The damage was done in the household finances due to the squeeze on spending power from higher inflation – just 30.8% of households think income growth will outpace inflation over the next five years. There is a growing pessimism about people's expectations for how comfortable their retirement will be as well – presumably reflecting the poor equity market performance year to date. Interestingly, the survey suggests people are not especially worried by higher interest rates. It is the higher gasoline price story that is doing the real damage.
Sentiment surveys don't always align
Source: Macrobond, ING
What you ask and how you weight responses plays an important part
We wouldn’t get worried about this index though. The chart above shows the divergence between the University of Michigan sentiment index (dreadful) and the Conference Board measure (not too bad). It is important to remember that what you ask and how you weight the response can alter the picture. The University of Michigan arguably focuses more on the inflation/cost of living dynamics, whereas the Conference board measure appears to place greater emphasis on how people see the jobs market and nominal incomes – hence the divide in the indices.
Politics plays a part in sentiment and can distort people's views on the economy
Source: Macrobond, ING
Saying and doing can be very different...
One crumb of comfort – neither survey has a great relationship with consumer spending with consumption set to surge in 2Q based on April data already published and ongoing strong people mobility data around retail and recreation in May and early June. Politics may be an important reason for this with perceptions on where the country is heading influencing sentiment, but not necessarily spending. Republican supporters are feeling the most negative ever and independents aren't exactly happy. Conversely Democrats are feeling pretty much in line as they have for the past 15 years. This could quickly reverse come the mid-term elections...
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Disclaimer: This publication has been prepared by the Economic and Financial Analysis Division of ING Bank N.V. (“ING”) solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. ING forms part of ING Group (being for this purpose ING Group NV and its subsidiary and affiliated companies). The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.
The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.
Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved. ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam). In the United Kingdom this information is approved and/or communicated by ING Bank N.V., London Branch. ING Bank N.V., London Branch is deemed authorised by the Prudential Regulation Authority and is subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. The nature and extent of consumer protections may differ from those for firms based in the UK. Details of the Temporary Permissions Regime, which allows EEA-based firms to operate in the UK for a limited period while seeking full authorisation, are available on the Financial Conduct Authority’s website.. ING Bank N.V., London branch is registered in England (Registration number BR000341) at 8-10 Moorgate, London EC2 6DA. For US Investors: Any person wishing to discuss this report or effect transactions in any security discussed herein should contact ING Financial Markets LLC, which is a member of the NYSE, FINRA and SIPC and part of ING, and which has accepted responsibility for the distribution of this report in the United States under applicable requirements.
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