Written by: Mike Senecal
Edited by: Lillian Guevara-Castro
Reviewed by: Adam West
Key Takeaways
- The University of Michigan Consumer Sentiment Index is a key economic indicator that provides subprime lenders with insights into consumer confidence.
- The latest data indicates consumer fears of long-term inflation are at their highest level since 1995.
- The index's survey-based methodology produces an actionable view of consumer borrowing patterns that often predicts broader economic shifts.
One way subprime lenders make informed decisions about marketplace actions is by gauging the impact of changes in supply and demand. Behavioral data with high predictive value enables informed decision-making about credit demand, risk assessment, pricing, messaging, and other priorities.
That made recent news from the University of Michigan Consumer Sentiment Index particularly concerning. Consumer sentiment dropped 10% from January to February to 64.7 following White House announcements that tariffs on China, Canada, and Mexico would be implemented. The shift marked the second consecutive precipitous drop in consumer sentiment.
Partisanship manifests itself prominently in the data. Sentiment among Republican respondents was unchanged while respondents identifying as Democrats and Independents were more pessimistic.
The UM Sentiment Index measures consumer economic expectations via monthly phone surveys.
That led to a significant rise in long-term inflation expectations, with the overall expectation now that prices will climb at an annual rate of 3.5% over the next five to 10 years — the highest rate since 1995.
Buying conditions for durables declined by 19%, “in large part due to fears that tariff-induced price increases are imminent,” wrote Joanne Hsu, Ph.D., and director of the University of Michigan’s Survey of Consumers. Expectations for personal finances and short-term economic performance fell by 10%. And expectations for long-term economic outlook fell by 6%.
Long-run inflation expectations “exhibit substantial uncertainty, particularly in light of policy changes under the new presidential administration,” wrote Hsu in a special report associated with the data release. Those expectations reflect “ongoing uncertainty over what new policies will actually be implemented and the consequences thereof.”
Authoritative Surveys Since 1946
Since 1946, the UM Sentiment Index has conducted monthly telephone surveys that sample about 500 households carefully selected to represent the population as a whole. The survey team asks participants about their current financial situation, expectations for the future, and views on the broader economy.
These questions fall into three primary categories alluded to above: personal financial conditions, general economic expectations, and buying conditions for durable goods. Combining the responses allows the team to create three separate measures — the Current Economic Conditions Index, the Index of Consumer Expectations, and the headline Consumer Sentiment Index.
The current conditions index reflects how consumers feel about their finances today. The expectations index tells us where they believe the economy is heading. This forward-looking perspective is particularly valuable for lenders trying to anticipate shifts in demand and credit risk.
Despite its value, the index is not without limitations. The small sample size and reliance on subjective responses mean that sudden events or political headlines can skew the data.
Since the pandemic, changes in the index have tended to run counter to actual economic performance. Nevertheless, its consistency over decades has made it a trusted tool for tracking consumer confidence.
Insights Into the Personal Dimensions of Finance
Subprime lenders respect the UM Sentiment Index for its timely insights into consumer attitudes.
Consumers with a high degree of confidence that the economy is on the right long-term track are more likely to take on credit, which can increase demand for all types of loans, including subprime loans. When sentiment is low, consumers may be more cautious about borrowing, potentially decreasing demand for subprime credit.
During those times, subprime lenders might anticipate higher defaults and may tighten their lending standards or raise interest rates to account for the increased risk.
Low consumer sentiment correlates with decreasing demand for subprime credit.
Significant drops in consumer sentiment can signal economic troubles ahead, including recession.
Given the increases in defaults and delinquencies we’re seeing, it behooves lenders to stay abreast of changes in consumer sentiment as they consider adjusting their strategies, tightening credit, or perhaps preparing for an uptick in loan modifications or collections.
Subprime lenders who understand how to interpret these signals can gain a competitive edge. By aligning lending policies with consumer sentiment, they can navigate uncertain markets more effectively — tightening or loosening credit as the mood shifts.
Regardless of whether inflation fears continue to shape consumer behavior, the UM Sentiment Index will play a prominent role in guiding the subprime lending community.
