What a 20% yearly drop in consumers' current-conditions gauge actually means for a furniture store, an HVAC firm and a restaurant

The University of Michigan's final October reading put its index of consumer sentiment at 48.0, a tenth of a point below September's 48.1 and 10.4% below a year ago. Bloomberg's headline called it a five-month low. The top-line number is the least interesting part of the release.

The number behind the number

Underneath, the survey split in two. The index of current economic conditions fell to 46.7 from 50.9 in September, down 8.3% in a month and 20.3% from 58.6 a year ago. The index of expectations went the other way, up 5.4% to 48.8 from 46.3. The two nearly cancelled out.

For an owner, the current-conditions reading is the one that matters on a Saturday. It measures how households feel about their finances and whether it is a good time to buy big things. Michigan's commentary said the decline was driven entirely by buying conditions for durables, which fell 18% "on the basis of higher interest rates and rising concerns about the affordability of such purchases." Year-ahead inflation expectations rose to 4.7% from 4.6%, and long-run expectations to 3.5% from 3.4%, both the highest since May. Michigan notes year-ahead expectations were 3.4% in February, before the Iran conflict, and that long-run expectations ran 2.8% to 3.2% in 2024.

Three businesses, three different problems

The figures below are scenarios, not forecasts. Michigan does not measure store sales, and a mood reading does not translate one-for-one into traffic. Use your own numbers.

The furniture or appliance store. Durables are the category that fell. If a store doing $60,000 a month in sales loses 10% of volume, that is $6,000 less revenue. At a 40% gross margin, that is $2,400 less gross profit a month against rent and payroll that do not shrink. The store's problem is financing as much as price. Check what your customers pay on installment offers.

The HVAC or home-services firm. Replacement jobs are deferrable when a household feels poor, and repairs are not. Five installs at $12,000 that slip from this month to spring is $60,000 of revenue moving out of the quarter. A firm with a service-agreement base has a floor under it. One that lives on replacements does not.

The restaurant. Dining out is a service, not a durable, and Michigan's finding was about durables. The expectations side is the bigger risk: with 4.7% year-ahead inflation expected, guests are watching check totals. Take a restaurant with $80,000 a month in sales and $25,600 in food and supply costs. If those costs rose 4.7%, that is $1,203 a month. A menu increase of 1.5% on $80,000 recovers $1,200. Whether regulars accept it is the open question.

605,380 independent restaurants are listed on CheckThisBiz, a directory of 7,704,724 independent US businesses, including 79,108 in CA, 54,058 in TX, 51,387 in NY. Chains and franchises are excluded from that count, so these are the owner-operated businesses that actually apply for funding.

What to do

• Sellers of big-ticket goods: promote what you can finance or break into smaller purchases, and keep inventory orders for the holiday season lean until November's data.
• Service firms: push maintenance contracts. They are the revenue that does not depend on a household's mood.
• Everyone: do not cut prices to chase a survey. Michigan's expectations measure improved, and a price cut is hard to reverse.

The next checks are Michigan's preliminary November reading on November 6 and the October CPI report on November 10, which Chronicle's calendar lists with the previous reading at 3.7% year over year. Those two releases show whether households' 4.7% expectation is turning into actual price increases.

Sources: University of Michigan Surveys of Consumers; Bloomberg (headline only). Scenarios are illustrations. This is market information, not investment advice.