UMich Confidence Drops As Rate-Hike Expectations Hit Historic Threshold

October's final UMich consumer sentiment data disappointed and slipped from September's data, with current conditions and expectations both declining.

However, perhaps the most critical element of the survey is that expectations for rates to increase (relative to expectations that rates will fall going forward), have reached a historical threshold that has typically preceded a contrarian recessionary impulse.

As UMich explains:

Interest rate expectations have always traced the outlines of economic cycles. As expansions lengthened, more consumers would expect interest rate increases, pushing the series to cyclical lows; then consumers would suddenly reverse course, lowering expectations just as downturns were about to commence (see the chart above). Note that recession dating lags by about one year, meaning that expected declines in rates are recorded about one year before the official announcement. While there is no reason to anticipate a sudden change in expectations in the months ahead, consumers have begun to resist rising interest rates on purchases of housing and vehicles.

Hopefully this time the Fed will manage interest rates to avoid hitting the threshold that causes widespread postponement as has been true in the past.

Unfortunately, it seems the impact has already begun as buying conditions in aggregate are trending lower...

Favorable vehicle buying attitudes remained at the same five-year low recorded last month. Consumers made as many favorable as unfavorable references to prices, well below the positive balance in last November’s survey, and net references to low interest rates on vehicle purchases were mentioned by one-third of last year’s total. Favorable home buying conditions remained at depressed levels, even as the proportion citing attractive pricing inched upward. The market is dominated by mortgage rates, with favorable references falling by more than half compared with last November. Overall, the net declines will act to reduce the number of homes and vehicle sales in the year ahead.