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
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.