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Pull back the curtain on financial trends. Wealth Management Chief Investment Officer Katie Nixon tackles big market questions to help you distinguish between fact, fiction and theory.
Katie Nixon (00:14):
I'm Katie Nixon, and this is Market Currents. Today. Let's take a closer look at the University of Michigan's consumer sentiment survey, an important and influential monthly snapshot of how US households feel about their own finances and the broader economy. Investors and policy makers closely watch what the survey indicates about sentiment surrounding inflation and spending decisions. These may influence consumers' behavior, and that's the largest component of the US economy. First, what happened? So the good news from the latest survey reported on January 27th is that those surveyed feel much better about personal finances and conditions for buying durable goods because of strong incomes and easing inflation. What's even more important is the details about specific economic topics. So inflation expectations receded for the fourth straight month, falling to 3.9% in January from 4.4% in December to reach the lowest since April 2021. While these survey results indicate that American consumers expect prices to increase more than in the two years prior to the pandemic, the expectation has stayed within an narrow range, and economists view this with optimism.
(01:27):
The thinking goes that if consumers become convinced that price increases would continue to accelerate, that would trigger the vicious cycle known as the wage price spiral. Workers expecting their lives to get more expensive, demand more pay, and this provokes companies to charge more for goods and services in a feedback loop. The less good news reflected in that January survey though, is that two thirds of consumers expect an economic downturn during the next year as they remain awash in uncertainty about inflation and the potential crisis surrounding government spending limits. So why does it matter? Decisions made by the Federal Reserve are extremely consequential to financial markets and to the economy at large. The members of the Federal Open Market Committee responsible for guiding Fed policy have recently shifted their focus from forecasts, which use models to extrapolate the effects of policy into the future, to current more measurable data that look at the actual effects of their decisions.
(02:37):
Sentiment data has taken on increasing importance in this evaluation process. The University of Michigan survey asked 50 questions by phone to at least 500 people every month looking for a read of respondent's financial situation and their short-term and long-term perspectives on the economy. Now let's look at how you can think about this data. One of the most worrisome unknowns in the financial world right now is the cumulative effects of a year of aggressive monetary tightening. The fear is that in its urgency to tamp down inflation, the US Central Bank's large and rapid boost to the policy rate may create a dangerous fallout in the form of too much economic deceleration and too many jobs lost. Because of the way Fed policy works its way into the larger economy with long and variable legs, there is always concern that the effect of a misstep becomes clearly evident only long after the fact.
(03:32):
Survey respondent's expectations for less inflation suggests a couple of positive things. One is that the Fed's actions are viewed as effective. This is a win for an organization that's faced questions over its credibility. Another is that the trajectory of price increases is seen to have a self-fulfilling element as shopper's expectations influence their behavior, and that's part of the recipe for higher or lower inflation. And even the pessimism from survey results about the outlook for economic growth could be revealing a silver lining, that monetary policymaker's strategy taking aggressive measures to rapidly cool economic growth in order to counter inflation was the right one. And this in turn, lessens the concern that continued large and potentially disruptive interest rate increases will be necessary. Thanks for joining me for Market Currents. I'll be back soon with another data point.
Disclaimer (04:26):
Thank you for listening to our podcast. Subscribe to Market Currents from your favorite podcast app to be automatically notified of new episodes. This audio podcast is being provided for informational and educational purposes only, and is not meant to be taken as investment advice or recommendation of any specific investment product or strategy. The information does not take your financial situation, investment objective, or risk tolerance into consideration. Listeners, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, investment, accounting, or tax advice from their own counsel. The Northern Trust Company is an Illinois banking corporation with Illinois file number 2016. It is an equal housing lender and member of FDIC.