Consumer sentiment edges down in February as expectations flag

Consumer sentiment edged downward in early February, with the entire loss concentrated in the Expectation Index and among households with incomes below $75,000. Households with incomes in the bottom third reported significant setbacks in their current finances, with fewer of these households mentioning recent income gains than anytime since 2014 (see the chart). When asked to assess their current financial position, the deep divisions become apparent: among those with incomes in the bottom third, just 23% reported improved finances, the lowest since 2014; in contrast, among those with incomes in the top third, 54% reported their finances had improved. Mentions of income gains fell to just 17% among those in the bottom third, compared with 44% in the top income third.

Presumably a new round of stimulus payments will reduce financial hardships among those with the lowest incomes. More surprising was the finding that consumers, despite the expected passage of a massive stimulus bill, viewed prospects for the national economy less favorably in early February than last month. In contrast, the proposed stimulus is expected to prompt a very strong pace of economic growth, with the differences mainly about the appropriate size and pace of federal spending. The legislative debate essentially focuses on whether low inflation or full employment is the more important policy goal, with one side accepting greater employment risks and the other side accepting greater inflationary risks. The expected strength in consumer spending in 2021 and 2022 critically depends on a significant reduction in precautionary motives, which in turn depend on progress against the pandemic as well as favorable trends in both inflation and employment.