The University of Michigan consumer sentiment index is down 3.4 points to 60.4 in the preliminary report for November from 63.8 in October, and is not all that much higher than the 56.8 in November 2022. The November reading is below the consensus of 63.5 in the Econoday survey of forecasters. Sentiment is lower for both current and future conditions as consumers feel the pinch of higher interest rates that make some purchases more costly now and with less hope that interest rates will come down in the near term.

The index for current conditions is down 4.9 points to 65.7 in November, its lowest since 64.9 in May. The index for six-month expectations is down 2.4 points to 56.9 in November and its lowest since 55.4 in May. Consumers' concerns are perhaps less about price inflation and more about access to credit and affordability of big-ticket purchases.

The 1-year inflation expectations measure is up 2 tenths to 4.4 percent in November to its highest since 4.6 percent in April. The increase comes in spite of a rapid decline in gasoline prices which is the more usual determinant in higher near-term inflation expectations. Instead, consumers are reacting to the realities of higher financing costs, as well as increased worries regarding the geopolitical situation. The 5-year inflation expectations measure is also 2 tenths to 3.2 percent, its highest since 3.2 percent in August 2008.

While the increase is notable, it could well be revised lower in the final report on Wednesday, November 22. Even so, it suggests that consumers see inflation as more persistent over the medium term than previously thought. Fed policymakers probably won't interpret this as inflation expectations coming unanchored, but it could be enough that restrictive monetary policy may get another 25 basis point hike at the December 12-13 FOMC meeting and/or that rates will remain higher for longer.

Consumer sentiment in the first indication for November, which in October fell more than 4 points to 63.8, is expected to slip slightly further to 63.5.

The University of Michigan's Consumer Survey Center questions households each month on their assessment of current conditions and expectations of future conditions. Preliminary estimates for a month are released at mid-month and are based on about 420 respondents. Final estimates are released near the end of the month and are based on about 600 respondents.

The pattern in consumer attitudes and spending is often the foremost influence on stock and bond markets. For stocks, strong economic growth translates to healthy corporate profits and higher stock prices. For bonds, the focus is whether economic growth goes overboard and leads to inflation. Ideally, the economy walks that fine line between strong growth and excessive (inflationary) growth.

This balance was achieved through much of the nineties and, in large part because of this, investors in the stock and bond markets enjoyed huge gains. It was during the late nineties that the consumer sentiment index hit its historic peak, reaching levels that were never matched during the subsequent 2001 to 2007 expansion nor during the long expansion following the Great Recession.

Consumer spending accounts for more than two-thirds of the economy, so the markets are always dying to know what consumers are up to and how they might behave in the near future. The more confident consumers are about the economy and their own personal finances, the more likely they are to spend. With this in mind, it's easy to see how this index of consumer attitudes gives insight to the direction of the economy. Just note that changes in consumer confidence and retail sales don't move in tandem month by month.