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What on earth is going on in the minds of American consumers right now? That is a question many investors want the answer to. After all, those US shoppers have long been an important driver of the global economy, since private consumption accounts for two thirds of America’s gross domestic product. But recently their behaviour has looked very odd.
For more than a year, polls have consistently painted a picture of profound popular pessimism. A survey of 3,000 adults in the second quarter by TransUnion, for example, suggests that 75 per cent of consumers think we will be in recession soon — and 44 per cent think we are already in one.
Meanwhile, the Michigan survey of consumer confidence went to just over 60 in June — better than the ultra gloomy level of 50 seen a year ago, but well below the levels that hovered at just under 100 for several years before the pandemic.
Yet, even amid this gloom, the US economy continues to grow at a strong(ish) pace, partly because retail sales have remained surprisingly resilient. And household economic fundamentals look surprisingly healthy in the official statistics.
The San Francisco Federal Reserve recently analysed the impact of the US government’s $5tn-odd Covid-19 stimulus and concluded that American households had an eye-watering $2.1tn excess savings in 2021, due to that largesse.
Consumers have subsequently run down this cushion. But the research notes that “there is still a large stock of aggregate excess savings in the economy [of] some $500bn . . . households on average, including those at the lower end of the distribution, continue to have considerably more liquid funds at their disposal compared with the pre-pandemic period.” Moreover, it predicts that “these excess savings could continue to support consumer spending at least into the fourth quarter of 2023.”
Meanwhile, if you look at the so-called “misery index” — a metric that tracks consumer stress — the picture looks more cheerful than “in 83 per cent of the months since 1978”, according to David Kelly, a strategist at JPMorgan. That is because one key component of this index is inflation, which is now falling, after surging last year; the other is unemployment, which is at a 50-year low.
More striking still, another composite sentiment index that JPMorgan tracks, using “inflation, unemployment, stock prices, gasoline prices and payroll job gains”, is displaying a “reading for June 2023 [that] at 64.4 is the biggest outlier of all, more than . . . 3.8 standard errors below its predicted value of 98.6.” In plain English, consumers are telling pollsters they are gloomy; the data, however, says they are not.
Why? One potential explanation is that the data is wrong or, more accurately, incomplete. It is possible that the aggregate calculations of surplus savings in the San Francisco Fed research, for example, fail to capture the pain now being felt by some socio-economic groups, or is simply out of date. Indeed, research by economists at the Washington Fed that uses a different methodology, implies that excess savings might already be depleted.
Similarly, it is also entirely possible that the lived experience of consumers is worse than official employment and inflation data imply. Research by the Ludwig Institute for Shared Economic Prosperity, a Washington think-tank, suggests that poor people face a real inflation rate of 5.8 per cent — not the official 4.7 per cent — because the goods they consume are rising faster in price than the average. It also argues that functional unemployment rate is above 20 per cent — not the official 3.7 per cent — because so many “jobs” are deeply insecure and low-paying. If so, that might explain the gloom.
However, a second potential explanation is that it is the polls — not the data — that are skewed. More specifically, it is possible that consumers are extrapolating a wider fear of rising interest rates, geopolitical risks and/or political gridlock on to their assessment of the economy, creating biases.
One clue that this skew might be happening is that the Michigan survey shows that consumers are more cheerful about their personal finances than the macroeconomy. Another is that Republicans are dramatically more pessimistic than Democrats, even when they hail from the same socio-economic group. If nothing else, this shows the folly of creating economic models around the concept of the consistently “rational man”.
Of course, it is also entirely possible — and indeed probable — that both explanations are correct, namely that the polls and data are both incomplete. That is my guess.
But as the mystery bubbles on, there are two tangible lessons. The first is that a hefty dose of humility is currently needed when judging the future trajectory of America’s economy; the past is not necessarily a good guide to future trends, given the Covid shock.
Second, this uncertainty also shows why the Fed (and others) need to conduct far more on-the-ground, ethnographic research to see how consumer culture is changing, and whether this gloomy sentiment will damp animal spirits later this year.
There are hints it might: recent data on restaurant spending and durable purchases has softened, from previous highs. But right now those shoppers are a baffling tribe. So much for America being the land of optimism.
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