With midterms approaching, Americans’ confidence in the economy is in a tailspin

By Alicia Wallace, CNN

(CNN) — It’s another day, another historically weak reading of how Americans feel about the economy.

However, this one is landing right before the midterm elections.

The University of Michigan’s closely watched consumer sentiment index fell to a preliminary reading of 46.3 from 48.1 in September. If Friday’s lower-than-expected reading were to hold, it would mark yet another historically weak reading for sentiment and a new second-lowest ever on record.

Those records go back 74 years, meaning that Americans are feeling worse now than they did during the Vietnam War, the 1970s oil crisis, 9/11, the Great Recession, the Covid-19 pandemic, and the inflation surge afterward.

In fact, five of the lowest readings on record have occurred this year (with May being the nadir).

“It just underscores how tough people are feeling out there, and it obviously doesn’t particularly bode well for the Republicans as we rapidly approach the midterm elections,” said James Knightley, chief international economist at ING.

In recent months, gas prices have climbed higher, inflation has picked up some steam and interest rates started moving north once again.

Sentiment hasn’t been great for years, and Americans’ downbeat feelings about the economy and stubbornly high inflation contributed to Republicans taking control in the last election, economists and pundits have noted.

Vulnerabilities in the ‘K’

The low sentiment, however, appears to run counterintuitive to a bevy of metrics that show the economy is performing just fine.

Knightley attributes the breakdown in the relationship between sentiment and spending to the “K-shaped” economy narrative where high-income households are increasingly the key driver of US consumer spending.

He cited Federal Reserve data that showed the top 20% of households (with annual income of $155,000 or more) hold more than 70% of the wealth in America and those households account for 40% of all spending.

“If the stock markets keep moving along quite nicely, we can keep these trends in play,” he said. “But if we were to see a stock market correction at a time when you’ve still got stress elsewhere, that could really undermine the US growth story.”

But while it could be easy to cast aside Friday’s report as just another lousy sentiment reading, it’s ringing some alarm bells about Americans’ abilities and desires to continue spending, Knightley said.

“We’ve got these ‘is it a good time to buy’ categories and 73% think it’s a bad time to buy a household appliance; 78% think it’s a bad time to buy a vehicle; and 87% think it’s a bad time to buy a home,” he said. “These are all key drivers of economic activity.”

Inflation expectations move higher

Friday’s report showed that the overall consumer sentiment index was driven lower by people’s negative feelings about the current economic situation: That measure tumbled 12.2% from September to hit an all-time low of 44.7.

A decline in sentiment among respondents who identify as independents more than offset increases seen among Democrats and Republicans, Joanne Hsu, director of the university’s Surveys of Consumers, said in a statement.

Some of the biggest declines were among lower-income consumers and those with little exposure to the stock market.

“Frustration over cost-of-living continues to mount, as consumers across the political spectrum believe that the trajectory of the economy has weakened since the beginning of the year,” she said.

September’s report showed a worsening of respondents’ opinions about the government’s economic policy. That decline in favorability was notable among Republicans, Hsu said. In September, 35% said the government was doing a good job with the economy versus 62% in March.

Survey respondents also expect inflation to get worse. Year-ahead inflation expectations ticked up to 4.7% from 4.6%. In February, before the start of the war with Iran that pushed gas prices higher, those expectations were for 3.4% inflation.

Consumers’ expectations about the pace of future price hikes are closely tracked by the Federal Reserve, which last month hiked interest rates for the first time in three years.

If people believe that prices will only continue to rise, they might spend more now and demand higher wages, and businesses might raise prices to accommodate higher demand and wages – thus raising inflation.

The latest official reading on inflation lands next Wednesday when the Consumer Price Index is released for September. Economists are expecting that annual inflation likely rose last month to 3.6%, a four-month high.

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