July 18, 2025
Every month economists anxiously await signs of an economic slowdown and/or acceleration in the inflation rate. Every month they are disappointed. In our opinion, most economists continue to underestimate the strength and resilience of the U.S. economy. They believe that the extremely low level of consumer confidence will inevitably lead to a slower pace of spending. Maybe, but we are not convinced. We suggest that the combination of a negative bias from the mainstream media and the steady cry of alarm from social media sites have contributed to consumer fear. As long as they have a job, wages climb, their home continues to increase in value, and stock prices rise, consumers are constantly reminded that their personal situation is not so bleak and they continue to spend at a moderate pace. For now the economy remains relatively solid with inflation steady but faster than desired.
Consumer sentiment plunged in 2020 as the COVID-related shutdown triggered the sharpest GDP drop in history. That is what typically happens. Consumer sentiment plunges, consumers cut back on spending, and the economy slips into recession. Historically, changes in consumer sentiment are a good leading indicator of changes in economic activity. That is why the expectations part of sentiment is one of the ten components of the index of leading indicators.
But that historical relationship has fallen apart in recent years. For example, inflation soared in 2020 and 2021 and consumers worried that the Fed tightening initiative would short-circuit economic activity and plunge the economy into recession. But the drop in confidence did not cause consumers to curtail spending. Consumer spending remained robust. Why the breakdown in this relationship?
A couple of factors combined to boost consumer net worth which seemed to counter much of their pessimism.
First, shortages of building materials following the 2020 recession caused builders’ cost of materials to skyrocket, and the Fed’s foot-dragging in raising interest rates to combat rising inflation rate, combined to boost home prices by 40% in less than two years.
Second, following a stock market correction in 2022 caused by the rising inflation rate, the S&P 500 index began a dramatic run-up which lasted more than two years and propelled this index to a record high level. When Trump took office in January of this year and threatened a dramatic increase in tariffs, the stock market sank 20% and briefly dipped into bear market territory. But as Trump reduced some tariffs and delayed others, the stock market soon turned upwards, climbed at breathtaking speed, and completely erased the earlier drop in three months. It is once again at a record high level.
The dramatic increase in both home prices and the stock market boosted consumer net worth to a record high level. It has risen 12% in the past year alone. We would suggest that this wealth gain matters to consumers when they decide whether they can afford that European vacation this summer or are willing to dine out a couple of times per week.
Another reason why consumers may be continuing to spend despite an apparent lack of confidence is that the unemployment rate remains very low. At 4.1% it is essentially at its full employment level. That means that everybody who wants a job has one. If you get laid off for some reason the odds are good that you can get another job fairly quickly. Without any particular fear of a loss of their income stream consumers remain willing to spend.
Having said that payroll employment growth has slowed gradually for the past couple of years. Jobs growth has slipped from 400-500 thousand per month three years ago to 135 thousand today. Firms are reducing jobs growth largely by attrition. If a worker leaves his or her position may not be filled. Every manager who has a position to fill has to convince senior management that the job could not be done by AI. At the moment the economy is strong enough that firms are not feeling compelled to reduce headcount via layoffs.
Three years ago there were two job openings for every unemployed worker. Today that ratio has dropped to 1.1 – which is exactly where it was prior to the recession. In that earlier period the jobs market was seriously overheated. Today it is roughly in equilibrium and likely to remain so through the end of the year.
Economists are trying to solve the conundrum whereby consumers say they are worried, but refuse to rein in their pace of spending. We suggest that the mainstream media has always had a negative bias. Bad news sells newspapers and attracts viewers. In addition, there is no muzzle on social media. Anybody can say anything with or without merit. Unfortunately, these unfiltered responses influence many consumers’ attitudes regarding the pace of economic activity, the likelihood of an increase in inflation, and the anticipated response by the Fed. To form an opinion it is imperative to understand the credibility of the person or group you are reading. Unfortunately, many readers and viewers do not take the time to do so.
Stephen Slifer
NumberNomics
Charleston, S.C.
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