Consumer Sentiment Up Slightly in Late February 2022

The University of Michigan Consumer Sentiment Index (MCSI) ended February 2022 at 62.8, up marginally (by 1.8%) from a decade-long low of 61.7 recorded in the first half of the month, according to final results released on Feb. 25, 2022. Despite the small uptick, the MCSI remains at its worst level in a decade. As in the preliminary results for February, the loss was still entirely due to a 12.9% decline among households with incomes of $100,000 or more.

The final value of 62.8 for February 2022 puts the MCSI 6.5% below its final reading of 67.2 in January 2022 and 18.2% under its value of 76.8 one year ago in February 2021. The report observes that descending sentiment in February resulted from inflation-induced declines in personal finances, widespread awareness of rising interest rates, falling confidence in the U.S. federal government's economic policies, and the most negative views of the long-term prospects for the U.S. economy that have been recorded by respondents in the past decade.

Impact of Russia-Ukraine Conflict Not Captured

Nearly all consumer interviews used in compiling the final February 2022 survey were conducted prior to the Russian invasion of Ukraine. As a result, its impact is not yet being felt or anticipated by consumers. The report indicates that the most likely impact of the conflict on the U.S. economy probably will be through rising energy prices, although the size and length of those potential increases are subject to substantial uncertainty at this point in time.

Inflation: 'Financial Harm and Growing Angst'

The report notes that consumers are feeling increased "financial harm and growing angst" as a result of rising inflation. Expecting that the Federal Reserve will focus on reining in inflation at the cost of slower economic growth and higher unemployment, almost 90% of survey respondents expect that the Fed will hike interest rates.

The Fed's extended "clinging" to the belief that rising inflation has been mainly the result of transitory factors has sparked worries that it has missed opportunities to nip inflation in the bud at its earliest stages. As a result, many believe that aggressive actions are necessary right now "to avoid the potential establishment of an inflationary psychology that acts to form a self-fulfilling prophecy."

The report notes that economic sanctions against Russia are likely to spark countermeasures that could harm the U.S. economy. If that comes to pass, the Fed may "give special consideration to any associated economic slowdown and rising unemployment." The report also theorized that economic sanctions against Russia would be lifted only if Ukraine's sovereignty is maintained, but not if Russia prevails. As a result, "Consumers may double-down on precautionary behaviors if the greater cyber risks associated with the conflict are now borne by domestic households."

Related Indexes Are Down Again

The MCSI final report for February 2022 also included Michigan's Current Economic Conditions Index and Index of Consumer Expectations. In the preliminary February 2022 report, the Current Economic Conditions Index was down by 4.9% from January 2022 and down by 20.5% from February 2021. In the final report, the readings had worsened, with the declines now at 5.3% and 20.9%, respectively.

In the preliminary February 2022 report, the Index of Consumer Expectations declined by 10.5% from January and by 18.8% from the previous February. The final report shows some noticeable improvements, with these declines now at 7.3% and 16.0%, respectively.