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Economic Report: U.S. consumers suffered a ‘stunning loss of confidence’ in early August, University of Michigan survey finds

The numbers: The University of Michigan’s gauge of consumer sentiment plunged to a preliminary August reading of 70.2 from a final July reading of 81.2. Economists polled by the Wall Street Journal had expected an August reading of 81.3.

It is the lowest sentiment reading since December 2011, below any level in the beginning of the pandemic last year.

There have only been six larger drops in the index in the history of the survey.

Key details: According to the UMich report, a gauge of consumers’ views on current conditions tumbled 77.9 in August from 84.5 in the prior month, while a barometer of their expectations fell to 65.2 from 79 in July.

Household expectations of inflation over the next 5 years rose to 3% from 2.8% in July, economists said. That’s much firmer than readings over the prior three years. One-year inflation expectations slipped to 4.6% in early August from 4.7% last month.

Big picture: The decline was due to consumers sensing that the delta variant of the coronavirus means that the pandemic will not end soon. This caused an emotional reaction and generated negative assessments about the economy’s likely performance.

The economy had been humming along and the Fed was preparing to exit its ultra-easy policy stance. If consumers stop spending and avoid crowds, the outlook could darken quickly. Price gains seen this year are unlikely to unwind quickly, and this could result in stagflation – higher prices and a slumping economy.

Consumer sentiment had been on the mend although it never fully recovered to its pre-pandemic readings over 100.

What are they saying?  “It appears that amid the potential for another wave of Covid-related shutdowns, consumers are retrenching and taking a wait-and-see approach to any new spending.,” said T.J. Connelly, head of research at Contingent Macro.

Market snapshot: Stocks lost most of their early gains after the confidence data with the Dow Jones Industrial Average
DJIA,
+0.11%

trading up 2 points.

The yield on the 10-year Treasury note
TMUBMUSD10Y,
1.319%

moved lower.

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