April 29, 2022

The final estimate of consumer sentiment for April rose 5.8 points to 65.2 after having fallen 3.4 points in  March.  The March level was the lowest in a decade.

Surveys of Consumers Chief Economist Richard Curtin said, “The downward slide in confidence represents the impact of uncertainty, which began with the pandemic and was reinforced by cross-currents, including the negative impact of inflation and higher interest rates, and the positive impact of a persistently strong labor market and rising wages. The global economy has added even more uncertainties about prospects for the U.S. economy, including the growing involvement in the military support for Ukraine, and renewed supply line disruptions from the COVID crisis in China. Who would not be apprehensive about future conditions, even if on balance they anticipated a continued expansion? Moreover, consumers have lost confidence in economic policies, with fiscal actions increasingly hampered by partisanship in the runup to the Congressional elections. Monetary policy now aims at tempering the strong labor market and trimming wage gains, the only factors that now support optimism. The goal of a soft landing will be more difficult to achieve given the uncertainties that now prevail, raising prospects for a halt, or even a temporary reversal, in the Fed’s interest rate policies. The probability of consumers reaching a tipping point will increasingly depend on prospects for a strong labor market and continued wage gains. The cost of that renewed strength is an accelerating wage-price spiral.”

We hear the angst amongst consumers regarding the inflation outlook.  But 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 has been rising rapidly.  .

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 2.5% by the end of the year, the funds rate will still be  highly accommodative because the inflation rate is expected to increase 8.4%.  Thus, the real funds rate will be -5.9%.That is not going to slow the pace of economic activity very much.

What strikes us is the divergence between the University of Michigan’s consumer sentiment index and the Conference Board’s measure of consumer confidence.  It is hard to believe the U of M data which says that conference today is much lower than it was in March and April of 2020 when the pandemic had everyone petrified, and that is nearly as low as it was in the very deep 2008-2009 recession following the failure of Lehman Brothers.  The two series can diverge from one month to the next, but something has to give.

We expect GDP growth in 2022 of 2.0% and 2.5% GDP growth in 2023 as supply constraints begin to ease.

Consumer expectations for six months from now rose from 54.3 to 62.5.

Consumers’ assessment of current conditions climbed from 67.2 to 69.4.

Stephen Slifer


Charleston, SC