Is bad news good news? Consumer sentiment index declines in May

When it comes to economic news and its impact on markets, sometimes bad news can be good news, or even bad news, at least not completely bad news.

For example, the University of Michigan’s monthly survey of consumer sentiment is widely considered a key indicator of consumer attitudes. It is also one of many reports the Federal Reserve monitors as it decides what to do with the federal funds rate.

The university’s latest report, released on Friday, found a significant decline in consumer sentiment. That’s generally considered a bad thing, maybe even for the economy. But the market rose on Friday. Here’s why:

Consumer sentiment falls the most in six months

As Fed leaders have been saying all week, interest rates won’t cut until inflation starts to fall, and inflation won’t start to fall until the economy slows or the labor market cools.

Of course, investors are desperate to see interest rates cut. Lower interest rates can lower a company’s borrowing costs, encouraging more investment and thus higher profits. Lower interest rates also lower the cost of borrowing for consumers, which is good for banks and, most importantly, leads to increased consumer spending.

When businesses invest and consumers spend, it’s good for the markets and the economy. But to lower interest rates, the Fed must slow the economy to lower prices and lower the inflation rate to ultimately reach its set 2% target.

If this all sounds confusing and counterintuitive, it is on both counts.

This leads us to a consumer survey from the University of Michigan. May results showed the index fell 13% to 67.4 from 77.2 in April. This is the lowest score since 61 points in November. Through the first four months of this year, the index was between 77 and 79.

“This 10 index point drop is statistically significant and brings sentiment down to its lowest level in about six months. This month’s sentiment trend features broad consensus across consumers, with declines across age, income and education groups,” said survey director Joanne Hsu.

Additionally, the Consumer Expectation Index is 66.5, down 12.5% ​​from 76 in April and trending lower.

“Over the past few months, consumers have reserved judgment, but they are now aware of negative developments on several fronts. They expressed concern that inflation, unemployment and interest rates could all move in an unfavorable direction next year,” Hsu added.

What does it all mean?

While this is obviously not good news for the economy, it can be considered a positive development for markets and long-term economic growth.

This is because a slowing economy will lower inflation, which will lead to interest rate cuts by the Federal Reserve. Of course, if the Fed cuts interest rates, markets will rise and the economy will begin to improve. Anyway, that’s what I think.

As Minneapolis Fed President Neel Kashkari said this week, the fact that the economy didn’t slow down during last year’s rate-raising cycle was somewhat of a sticking point for Fed officials.

Meanwhile, Richmond Federal Reserve President Thomas Barkin said this week that the full impact of the interest rate hike on the economy has not yet been seen. Perhaps this is a sign that it is coming. And is it… good?