September 16, 2022
The preliminary estimate of consumer sentiment for September rose 1.3 points to 59.5 after having climbed 6.7 points in July.. The June level was the lowest on record and roughly comparable to the low levels reached in the 1980 recession.
Surveys of Consumers Director Joanne Hsu said, “Consumer sentiment was essentially unchanged in September, just 1.3 index points above August. The one-year economic outlook continued lifting from the extremely low readings earlier in the summer, but these gains were largely offset by modest declines in the long run outlook.” She added that, “.Consumers continued to exhibit substantial uncertainty over the future trajectory of prices. Uncertainty over short-run inflation reached levels last seen in 1982, and uncertainty over long run inflation rose from 3.9 to 4.5 this month, well above the 3.4 level seen last September.”
We hear the angst amongst consumers when they respond to the survey in particular regarding the inflation outlook. But the drop in sentiment seems totally out of whack with reality. Sentiment is far worse today than in the 2008-09 recession? It is far worse than it was in the midst of the pandemic in 2020? Seriously? Today labor is in short supply. Employers are going to keep hiring as quickly as they can. Wages will keep climbing. The consumers balance sheet is in terrific shape with debt in relation to income the lowest in 40 years. Consumer net worth remains high.
Having said all that, the recent surveys indicate clearly that consumers are worried. If sentiment is as bad as the survey data indicates consumers should be sharply cutting back on their spending. Thus far there is little evidence of that. Retail sales, for example, continued to climb in August. In real terms retail sales have leveled off but show little evidence of slowing down.
We look for workers to seek even larger wage gains which will boost the inflation rate even further. However, the Fed is expected to raise rates at each of its remaining FOMC meetings in 2022. The Fed also wants to begin shrinking its balance sheet by about $100 billion per month beginning this month. But make no mistake, even if the funds rate reaches 4.0% by the end of the year, the funds rate will still be highly accommodative because the core inflation rate is expected to increase 6.0%. Thus, the real funds rate will be -2.0%.That is not going to slow the pace of economic activity very much.
Both the University of Michigan’s consumer sentiment index and the Conference Board’s measure of consumer confidence show a significant drop in confidence this year. The two series can diverge from one month to the next, but the trends are similar.
Following declines in GDP in each of the first two quarters of the year, we expect GDP growth to climb 1.5% in the second half of this year which would produce 0.3% GDP growth for the year as a whole. We look for 1.5% GDP growth in 2023 as the real funds rate remains negative for most of that year and supply constraints continue to ease.
Consumer expectations for six months from now rose from 58.0 to 59.9.
Consumers’ assessment of current conditions rose from 58.6 to 58.9.
Stephen Slifer
NumberNomics
Charleston, SC
Going forward to the next reporting point will consumers focus on President Trump’s positive commentary for “Negative Interest Rates” and “Refinancing the US debt”
Since a lot of folks have savings accounts one would think :negative interest rates” would create negative consumer sentiment
Most people associate “refinancing” with financial difficulties
I wonder if that will have a negative on consumer sentiment
HI Allen,
Good question. But, at least in my mind, it is a moot point here in the U.S. I don’t think we will ever see negative rates but, then again, some of these other countries around the globe never thought they would get there either. If we should get to the point where negative rates become possible let’s keep an eye on confidence as you suggest. The soonest that might occur would be in the midst of the next downturn — whenever that is.
Steve
Steve
The rise in inflation and interest rates appears inevitable.
I am concerned about the effect this will have on our ability to meet our federal debt obligations.
At some point in the future will we reach a tipping point where cannot pay the interest on the debt?
Then what happens?
Hi Bill,
I have been worried about debt for some time. The path we are on seems unsustainable to me. Debt as a percent of GDP has climbed to 103%. The record was 106% right after WWII. But at that point you cut defense spending sharply and the ratio shrank quickly. This time 70% of the deficit each year is entitlements. Those will be difficult to cut and, hence, the ability to shrink the deficit to something manageable (3% of GDP) is unlikely.
Specifically, with re: to your question about inflation, inflation helps to shrink the deficit. If we get nominal GDP growth of, say, 10% (4% real growth + 6% inflation) revenue growth should be roughly 10%, Yes, interest rates will rise, and interest on the debt outstanding will climb. At the same time some government expenditures will shrink (think welfare payments, Medicaid). An easy way to resolve the budget/debt problem is some good old fashioned inflation.
While inflation may help the government, it hurts the rest of us, especially older people trying to live on a fixed income, and lower income individuals who do not get the benefits of higher home prices and higher stock market valuations.
The reality is that debt/GDP of 103% is not sustainable. If we have a problem like in 2020, when the Treasury loses tax receipts and government spending increases, the budget deficit explodes, and debt in relation to GDP takes a huge jump. Having said that, I have been worried about debt for ages and nothing bad has happened — yet. That does not suggest that we are supposed to ignore it. There will be a day of reckoning, but you and I may not be around to see it.
Steve- great information, is there any data on the distribution of consumer net worth i.e. is it even across income levels or aggregated in one or more segments? Could this explain some of the differences in consumer sentiment?
Hi George. Net worth is decidedly NOT evenly distributed. I have not looked for that information specifically, but just a quick check I found online which seems to give us a sense. It turns out that a PEW Research Center study noted that upper income families (which I guess it defines as income greater than $207,400 in 2018) held 79% of the wealth. The middle income group which I guess ranges from $28,700 in 2018 to $207,400 held 17% of the wealth, and the lower income category (less than $28.700) had 4%. The data are obviously old, but I am sure the numbers have changed not all that changed much. The bulk of that wealth comes from the stock market and home ownership. Thus, low income earners do not share much in the wealth of the country. Middle income earners have more, but still relatively little. The wealthier Americans have by far the biggest share of the pie. Thus, it seems to make sense that if you do a survey of consumer confidence, lower income earning families included in the survey are being hit hard and their confidence has plummeted. A big portion of their income goes to housing, gas, and food — all of which have risen sharply in price. They were just getting by before and now they have to make a choice — Pay the rent? Buy food for the family? Fill the car with gas?
But what bothers me the most is that the U of Michigan survey has confidence plummeting — below the 2020 low, and below the 2008-09 recession low. I am not sure that makes sense to me. The Conference Board measure of consumer confidence has it dropping, but the decline is not nearly as dramatic. So which is the better measure? The Conference Board data seem more consistent with the consumer spending data — some slowdown but not dropping off a cliff. I guess we will see.
Steve