November 19, 2021 | 13:29
U.S. Consumers: The Spirit Might Not Be So Willing
One paradox of the U.S. recovery is the wide chasm between how shoppers feel and how they behave. Consumer confidence is sagging, while spending, overall, remains strong. The University of Michigan’s confidence gauge sits at a decade low, while the Conference Board’s measure, though still comfortably above normal, has plunged since the summer. The latter metric is holding up better than the former only because it puts more emphasis on labour markets, which are strong. But even with job prospects nearly the best on record, consumer attitudes are much weaker than before the pandemic.
Yet, despite sagging spirits, consumers are opening their wallets and tap, tap, tapping their debit cards. Retail sales shot up 1.7% last month, and that was after earlier big gains. Although personal consumption growth downshifted to a middling 1.6% annual rate in the third quarter, this followed back-to-back quarterly gains in excess of 11% (stoked by stimulus cheques) and was held back by a limited supply of motor vehicles that led to the biggest reversal in auto spending in four decades.
You might ask then—given strong job growth (nearly four million new payrolls in the past six months), faster wage gains, zooming wealth, extra savings, and a receding Delta wave (until recently)—why American shoppers have turned glum? The answer, in part, likely involves a combination of COVID fatigue, the end of income-support and loan/rent forbearance programs, and the fact that many lower-income households have neither benefited much from soaring equity markets or (for renters) house prices, nor built up much savings. According to the BLS’s Consumer Expenditure Survey, the typical family in the two lowest income quintiles spent all of their income in 2020 (the latest data available). For many households, the road to higher living standards runs through a higher-paying job rather than a heated equity or housing market. True, wages are rising faster; in fact, the employment cost index’s 3.7% y/y advance in Q3 was the most in 17 years. But the entire increase, and more, was gobbled up by inflation. While well-off households can afford to pay higher prices out of ample savings, many others struggle to make ends meet on a budget stretched thinner by rising prices. The highest inflation in three decades likely explains part of the slump in consumer sentiment. Conference Board respondents expect the highest 12-months-ahead inflation in 13 years at 7%.
The Fed’s strategy of welcoming moderately higher inflation for a period, while working to get the jobless rate down fast, did benefit many households, initially. But with inflation now running much hotter than forecast—last December the median FOMC member expected PCE inflation of just 1.8% in the current quarter, while next week’s October report is expected to print 5.2% and 4.2% for the core; oops—and with labour markets possibly tighter now than before the pandemic (according to our in-house metric), this strategy now runs the grave risk of backfiring badly. For most workers, wage gains haven’t kept pace with inflation. And, if the situation persists in 2022, consumers could well remain in a foul mood, putting the recovery at risk in the event of a shock. That's not our base-case view, but something to keep in mind.