By Manuel Gutierrez, Consulting Economist to NKBA

 

Following three months of gains, the University of Michigan’s Index of Consumer Sentiment fell in March to 63.4, a 5 percent drop from the previous month. Consumers were feeling less optimistic, in part, because of the failure of Silicon Valley Bank — even though the banking crisis had not hit them up to that point. However, despite March’s drop, the index has improved by more than 25 percent from June of last year when the index hit 50, an all-time historical low since the index was started 70 years ago.

 

  • The Michigan index captures consumers’ views on the current situation and future expectations for three areas: the economy overall, their personal finances and their assessment of buying conditions for major consumer durables such as automobiles or houses. The index also includes consumers’ future expectations for inflation.
  • Despite the gains made since the middle of last year, the index was still far below pre-pandemic levels, when it was hovering around 100. It reached this point several times between 2017 and 2019, only to fall drastically after the pandemic and economic shutdown. In March 2023, the index was 7 percent higher than a year earlier.
  • Inflation expectations fell in March to an expected median price increase of 3.8 percent over the next year. This was lower than the 4.1 percent median expectation of the previous month — and the future inflation assessment was at an all-time two-year low.
  • Around a quarter of consumers felt that March was a good time to buy a house. In contrast, around 75 percent of them thought the opposite, providing reasons such as high home prices and high interest rates. The index score for “buying conditions for houses” stood at 43, roughly 100 points lower than its pre-pandemic level in 2019.
  • Experts are unsure how the worsening sentiment on home purchases will affect the desire of homeowners or rental-property owners to spend on housing improvements. The recent projections from the Joint Center for Housing Studies at Harvard — that home improvement spending will slow down this year — align with the deteriorating sentiment surrounding purchasing a home.