May 26 , 2023
The final estimate of consumer sentiment for May fell 4.3 points to 59.2 after rising 1.5 points in April. The June 2022 level of 50.0 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 slid 7% amid worries about the path of the economy, erasing nearly half of the gains achieved after the all-time historic low from last June. This decline mirrors the 2011 debt ceiling crisis, during which sentiment also plunged. This month, sentiment fell severely for consumers in the West and those with middle incomes. The year-ahead economic outlook plummeted 17% from last month. Long-run expectations plunged by 13% as well, indicating that consumers are concerned that any recession to come may cause lasting pain. That said, consumer views over their personal finances are little changed from April, with stable income expectations supporting consumer spending for the time being.
We hear the angst amongst consumers when they respond to this survey because of concern about the inflation outlook. That fear seems warranted to some extent. The reality is that while wages have risen 4.4% in the past year inflation has risen 4.9%. As a result, real wages have fallen by 0.5% So even though the consumers balance sheet is in terrific shape with debt in relation to income still very low, their purchasing power is declining. That is not a sustainable situation and it makes people nervous.
Given that sentiment is as a very low level, consumers should be sharply cutting back on their spending. Thus far there is little evidence of that. Consumer spending is growing slowly but steadily.
Consumers are currently spending vigorously on services. Goods spending had been declining for a year or so but it has begun to turn upwards. Specifically, spending on goods has risen 1.5% in the past year. But in the much bigger service sector spending rose by 2.7% in the past year. Consumer spending is gradually slowing, but it is certainly not collapsing. It should slow further in the months ahead as the Fed presses on with additional rate hikes.
The funds rate currently stands at 5,25%, But at 5.25% the funds rate is still highly accommodative because the core inflation rate has risen 5.5%. Thus, the real funds rate is -0 .25%.That is not going to slow the pace of economic activity very much. For this reason we expect the Fed to keep raising the funds rate to about the 6.0% mark by September..
Both the University of Michigan’s consumer sentiment index and the Conference Board’s measure of consumer confidence show a modest rebound in the past couple of months. The two series can diverge from one month to the next, but the trends are similar.
We expect GDP growth of 1.3% GDP in 2023 as the real funds rate remains negative through midyear and as the economy continues to crank out jobs.
Consumer expectations for six months from now fell from 60.5 to 55.4.
Consumers’ assessment of current conditions declined from 68.2 to 64.9..
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
another great article, Steve! Thanks as always
Thanks Michelle. Nice to hear from you. Hope all is well.