March consumer sentiment shows warning signs for the economy

The war in Iran over the last four weeks has sent consumer sentiment into a deep dive. The University of Michigan’s monthly survey shows a 6% decline in March.

What consumers have been saying and what they’ve been doing have been very different in recent years. But the latest data showed sentiment fell even more among higher-income consumers who have been helping prop up the economy. At the same time, inflation expectation rose. Those are warning signs.

Rewind to just before the U.S. and Israel launched strikes on Iran, and consumer sentiment was improving.

“Even in the couple of weeks right before the military conflict began, that trend was continuing,” said Joanne Hsu, who runs the survey.

But Hsu saw a sharp trend reversal after the bombs started falling.

“Any gains that we saw in the previous weeks were lost in the weeks thereafter,” she said.

By the time the survey closed on March 23, overall sentiment was down 6%.

“One source of positive news from this release — that the major deterioration was in short-run expectations,” Hsu said.

That means consumers expect the Iran conflict to resolve relatively quickly. That may be why, for now, consumer behavior hasn’t changed much. Carnival Cruise Line, for example, just reported banner bookings.

“We are definitely seeing upper-income households powering the economy forward in terms of travel and dining and a lot of discretionary spending,” said Bankrate analyst Ted Rossman.

But Rossman said he’s still concerned because the sentiment survey showed a 9% drop among higher-income consumers threatening the K-shaped economy.

“What is potentially new is that, if this situation is going to squeeze even people at the upper part of the K, that ultimately could be recessionary,” he said.

That could happen eventually, Rossman said, but for now, the economy is still strong.

Another warning sign is the rise in consumers’ inflation expectations from 3.4% to 3.8% a year from now.

“Consumers were already pretty discouraged about the state of the economy,” said Neale Mahoney, an economics professor at Stanford University. “And rising gas prices, coupled with [the likelihood that] we're going to see rising airline prices and food prices over the course of the year, is just going to make things worse.”

Mahoney said some of that pain is already baked in. He expects consumer sentiment to sour further next month.