The unprecedented economic turmoil unleashed on U.S. consumers since December, by the longest U.S. government shutdown ever, is driving Americans’ bananas, heading to food banks, payday lenders and fighting off lenders and landlords.
Tax Refund Mess
Adding more insult to the financial injury is the reduced tax refund amount produced by last year’s Tax Cuts and Jobs Act, wherein Americans received a puny decrease in federal tax withholdings in paychecks. However, in reality, working stiffs received slightly more net pay, due to under withholding.
For most Americans with little or no regular savings, the annual tax refund represents their only savings. To make matters worse, the IRS, due to the recent shutdown and new tax code, is running six to eight weeks behind processing 2018 returns.
Smarter 2019 Consumers
Federal and federal contract employees are now fighting to get their credit back on track. Additionally, new statistics are showing banks are reigning in consumer credit a bit as economic uncertainty abounds for 2019 and 2020. Recently, a big uptick in really late car payments is a major red flag for consumer lenders.
Finally, the year-over-year change in U.S. credit card debt, slowed dramatically in the last three months of 2018, from a revised 11.6% in October, to a revised 5.6% in November and 2.0% in December.
February Consumer Sentiment
However, the University of Michigan’s Consumer Sentiment Index for February, released today, reveals a significant jump between January and February of this year, but compared to one-year is slowly eroding.
Consumer Sentiment rose from 91.2 in January to 95.5 for February, or a +4.7% gain. Compared to February 2018, Sentiment is down -4.2%.
Consumer Current Economic Conditions increased from 108.8 in January to 110.0 for February, or a +1.1% gain. Compared to February 2018, Current Conditions is down -4.3%.
Consumer Expectations rose from 79.9 in January to 86.2 for February, or a +7.9% gain. Compared to February 2018, Expectations is down -4.2%.
The University of Michigan’s Consumer Sentiment Index notes the February gains reflect the end of the partial government shutdown as well as a more fundamental shift in consumer expectations due to the Fed’s pause in raising interest rates. Although the majority of consumers expected some additional rate hikes during the year ahead, that proportion has shrunk to the smallest level in the past two years. Perhaps more importantly, consumers’ long term inflation expectations fell to the lowest level recorded in the past half century.
While nominal income expectations remained at modest levels, consumers more frequently expected gains in their inflation-adjusted incomes in early February than at any other time in more than fifteen years. The data indicate personal consumption expenditures will remain the strongest sector in the national economy in 2019–up by 2.7% compared with a GDP gain of 2.2%. The data suggest that the Fed will find it even harder to justify another rate hike given the record low inflation expectations; the data will also add to the debate about the evolving relationship between unemployment and inflation as consumers now anticipate lower inflation and higher unemployment.