American consumers have rarely felt this glum about the economy. The University of Michigan's final October reading put its Consumer Sentiment Index at 48.0, the second-lowest level on record — sitting just above May's all-time low of 44.8 — as surging gasoline prices and stubborn inflation squeeze household budgets less than two weeks before the November 3 midterm elections.
What The Numbers Show
The Surveys of Consumers report, released Friday, said the index edged down to 48.0 this month from a final reading of 48.1 in September. Economists polled by Reuters had forecast 46.3, which had also been the index's preliminary reading for October — so the final number came in slightly better than expected, but still marks the second-worst print in the survey's history.
October's reading was the second-lowest on record after the all-time low of 44.8 set in May, not long after the Iran war began, according to Reuters.
"Purchasing power continues to dominate consumer views of the economy," said Joanne Hsu, the director of the Surveys of Consumers. "Sentiment is now 10% below a year ago and 15% less than February, just prior to the Iran conflict."
The inflation details in the report were equally grim. The survey's measure of consumer expectations for inflation over the next year nudged up to 4.7% from 4.6% in September. Twelve-month inflation expectations have surged from 3.4% in February, before the US-Israeli war with Iran started. Expectations for inflation over the next five years rose to 3.5% from 3.4%.
The political breakdown of the data carried a clear warning for both parties. The weakness was led by respondents who identified as independents — a critical bloc of swing voters. Their sentiment score dropped to 42.4 from 47.7 in September, just above May's record-low 40.6. Scores for Democrats and Republicans actually improved, meaning the national gloom is being driven by the voters who decide close elections.
Why Gas Prices Are Driving The Gloom
The single biggest driver of the sour mood is at the pump. A gallon of regular unleaded costs 40% more today than it did last year, and a gallon of diesel is running nearly 75% higher, according to CNN.
The numbers are stark: regular unleaded is averaging $4.29 nationwide, while diesel sits at $6.32 a gallon. Brent crude, the international oil benchmark, settled at $116.72 a barrel on Friday — a six-month high.
The current pain is still less than the spring spike: the survey's record low of 44.8 was set in May, a month that saw the national average for a gallon of unleaded hit a four-year high of $4.56. But five months later, the weekly trip to the gas pump barely feels better — and fresh refinery troubles are making it worse in parts of the country. Prices in Michigan have jumped 33 cents since Wednesday to $4.77 a gallon, while Ohioans are paying $4.37, a two-day jump of 39 cents.
"There is broad consensus that escalation is coming and that it could diminish flows of oil out of the Middle East," said Gregory Brew, a senior analyst at consulting firm Eurasia Group, in comments reported by CNN. "Right now, a lot of oil is coming out, but it's expensive," he added. "There is very little confidence that supply is sustainable."
The Midterm Stakes
The timing could hardly be worse for the party in power. Millions of US voters have already cast early ballots in the November 3 midterm election, which will determine control of Congress over the final two years of President Donald Trump's term, Reuters reported.
Voters' economic mood has never on record been this low heading into a major election, according to the Wall Street Journal. Before this year, the lowest survey reading in an October before a midterm or presidential election was 57.6, recorded in October 2008 — just as the financial crisis of 2008-09 was reaching its climax.
Polls show Republicans are likely to lose control of the House of Representatives and possibly the Senate, with Trump's approval rating sitting at a record low in a Reuters/Ipsos poll — a slump Reuters attributes to the skyrocketing fuel prices unleashed by his decision to attack Iran in late February.
In November 2008, dissatisfaction with the departing Bush administration helped Democrats capture the White House and both chambers of Congress. This election season, high gasoline prices, persistent inflation and a stable but staid labor market have taken a toll on shoppers' nerves — and analysts believe Democrats have a fighting chance or better to win races, even in former deep-red strongholds such as Texas.
The Paradox: A Booming Economy On Paper
Here is the puzzle that economists are struggling to explain: by many hard measures, the economy is roaring. S&P Global's preliminary October surveys showed US manufacturing activity at a 53-month high — the manufacturing PMI came in at 56, while services stood at 57.9, both firmly in expansion territory.
"The U.S. economy continues to boom at the start of the fourth quarter," said Chris Williamson, chief business economist at S&P Global Market Intelligence. He said the survey output readings are consistent with GDP growing at a 5% annualized rate after a 4% expansion was signaled for the third quarter. Businesses hired more workers to keep up with rising customer demand, with employment increasing in October at the second-fastest pace in four years. One survey of top executives pointed to "the best growth spell for U.S. businesses since early 2015," excluding the pandemic.
But the boom has a poison inside it. Critical shortages of some raw materials due to the ongoing conflict with Iran, high oil prices, and climbing business costs are pressing on prices — and companies are passing them on. "If that keeps up," Williamson said, "consumer-price inflation is likely to rise further above the Fed's target in the coming months."
In other words, the economy is growing fast, but ordinary Americans feel poorer. Growth is going to businesses and investors; pain is going to households.
What This Means
The final October sentiment reading crystallizes the election that November 3 is shaping up to be: an affordability election. Purchasing power, as Joanne Hsu put it, "continues to dominate consumer views of the economy" — and nothing dominates purchasing power like the price at the pump and the checkout line.
The independents' collapse is the number that should worry both parties. At 42.4, swing voters are sitting almost exactly where the whole country was during the May record low. Democrats improved and Republicans improved — partisans can rally. The swing voter cannot be rallied with talking points when diesel costs 75% more than it did a year ago.
The paradox of a booming macroeconomy alongside record-low sentiment is also a warning about the limits of topline statistics. GDP growth at a 5% annualized rate means little to a household watching gas prices rise 40% year over year. Sentiment surveys measure what people feel in their wallets — and right now, their wallets are telling them the economy is broken.
What Happens Next
All eyes now turn to the Federal Reserve. The Fed raised a key US interest rate in September to contain inflation and is expected to increase borrowing costs in the months ahead, with inflation running above 3.5% over the past year — well above the central bank's 2% target.
An interest-rate decision is due on Wednesday, and it is widely expected to leave rates on hold. But as ING economist James Knightley noted, evidence that the US economy is growing strongly with a healthy jobs market and high inflation means a rate increase in December is likely. Investors will be watching for signals on the likely timing and pace of future increases.
Meanwhile, the oil market holds the near-term mood hostage. Brent crude's six-month high, refinery troubles in the Midwest, and Eurasia Group's warning that "escalation is coming" mean gas prices could yet climb further before Election Day — or stabilize if supply fears ease.
For the midterms, history is not kind to the party in power when sentiment sits at these levels. The only comparable October reading before a major election — 57.6 in 2008, a full ten points higher than today — ended with the ruling party losing the White House and both chambers. Eleven days from now, voters get to render their own verdict.
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