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