Are mortage rates what are making consumers so miserable?

G. Samdani Avatar



This Friday we will get another edition of the University of Michigan’s report on US consumer sentiment. The consensus at the moment is for a dip to 76.0 from 77.2.

But when you zoom out on the survey, it sure doesn’t look like an economy with a strong stock market and the longest-ever streak of sub-4% unemployment.

UMich consumer sentiment

Using a regression model based on unemployment and current inflation, the authors show the survey should be close to the 96 pre-covid level.

What’s the problem?

I tend to think it’s the combination of the politicization of everything and the creeping misery in everything; probably due to over-consumption of sensational news.

This chart is damning when it comes to politics.

However, there’s a new column out today by Larry Summers and some coleagues who say it could be even simpler:

This column examines why consumer sentiment in the US remained depressed
in 2023 despite low unemployment and falling inflation, and finds that
increasing borrowing costs can explain much of this gap. The cost of
money is not included in traditional price indexes, indicating a
disconnect between the measures favoured by economists and the effective
costs borne by consumers

The article highlights that the US consumer price index doesn’t include interest payments (unlike others). Those payments rose 30% in 2023, the fastest on record as consumers paid more for cars and homes.

To isolate that, they used six survey questions regarding borrowing costs for
durables, vehicles, and homes, then called it the Cost of Money Index. It shows concerns as high as in the Volcker era.

The column also offers up an illustrative example of where CPI would be if it included borrowing costs, as it did before 1983.

It’s worth a read.

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