The stock market is setting record highs, the economy is showing surprising strength, unemployment is low, and yet US consumer sentiment is still relatively depressed. Why? The question is important since the U.S. consumer is a key driver of the economy, and continued spending is important to avoid a recession. Will the consumer keep spending? Let’s take a deep dive into the consumer to find out why they are in such a bad mood.
One of the most highly regarded indicators of consumer sentiment is the University of Michigan Consumer Sentiment Index, a highly regarded survey that tracks consumer attitudes going back to 1978. The survey is important since it can be a bell weather of spending trends. August 2024’s reading of 67.9 is below average and worse than the consumer attitudes during the Covid crisis. If you are putting off making big purchases then you are not alone since consumers overall are not very happy.
What is odd about August’s consumer sentiment numbers is that these levels of pessimism are usually associated with periods of recession, not economic expansions like we are seeing today. The Atlanta Fed’s GDP Now estimate for economic growth in the 3rd quarter of 2024 is 3.4% - a health pace of growth for the US economy. Meanwhile, the job market is still fairly strong, with an overall unemployment rate of 4.1%. Why is there a disconnect between consumer attitudes and other economic indicators?
One potential explanation is inflation, which continues to be a source of irritation. Even though inflation has cooled this year, the overall increase in prices since the pandemic has exceeded 20%. Even more concerning is that prices for essentials have increased by even more – energy prices are up 34%, food prices are up 26%, gasoline prices are up 36%, rent is up 25%. All of the price increases in basic necessities exceed the increase in wages.
As a result, consumers in lower or middle-class households who spend a large portion of their income on these basic necessities are finding less disposable income to go shopping, a fact hidden in the overall numbers. Moreover, the high inflation in basic necessities disproportionately impacts the younger generation. Those who saved well and purchased homes in the past decades have seen their home and investments increase at a rate equal to or higher than the overall inflation rate, softening the blow of higher prices. However, the new generation is seeing housing prices out of reach and costs for basic necessities eat away at their ability to save.
Another potential explanation for consumers’ bad mood is higher interest rates, which are not considered in the overall inflation rate. For the better part of the last 20 years, consumers have enjoyed unusually low interest rates that reduced the overall cost of purchase. Now that interest rates have normalized, returning to levels last seen in 2007, the cost of financing a purchase has nearly doubled. For example, not only have car prices increased by 23% since April of 2020, but the interest rate on auto loans has also increased from approximately 4% to over 7%, significantly increasing the monthly payment for the same vehicle compared to only 4 years ago.
The combination of inflation and higher interest rates results in many consumers, particularly the young and lower income households, who are simply struggling. While the overall economic statistics are solid, these overall statistics hide what many consumers are truly feeling – times are getting tougher and that is putting consumers in a bad mood. Key to continued economic growth will be reigning in inflation and real wage growth for the majority of American consumers.
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