Essential Economics

 — Mark Frears

Survey says

So, how are you feeling? Can you be more specific? Emotionally, physically, spiritually or financially? It has to be a thankless job getting people to respond. Keeping it short and providing incentives would be best for me. Do you remember the note passed in class, asking you if you liked someone? Check yes or no! That was a very telling survey.

In the land where the predicted recession has not shown up, inquiring minds want to know what the economic engine, the consumer, is thinking. What will they do next?

Conference Board

First out last week was the Conference Board’s survey of consumers’ current state and expectations. As you see below, both of these are treading water, struggling for direction.

As you may recall, the Consumer Confidence Index is more influenced by employment and labor market conditions. Given the low unemployment rate, and apparently plentiful job opportunities, you would expect the expectations to be higher.

The other potential weakness seen in this release is the historically deeply negative spread between the expectations and present situation. This has signaled recession in the past, and, given this is the 35th straight month with a gap greater than 30 points, we would expect a recession in 1 to 3 years. 

U of M

As I grew up in East Lansing, I don’t put much credence in anything that comes out of Ann Arbor, but we will take a look at the other major confidence survey. In the chart below, you can see this measure has been on an improving trend since hitting a bottom in June 2022.

    Source: Oxford Economics/Haver Analytics

The Michigan sentiment index has a greater emphasis on household finances and the impact of inflation. Given the stalled progress on the inflation fight, we may see this upward trend stall out.

Personal Consumption Expenditure (PCE) is the Fed’s inflation measure of choice, and the release this week showed no significant improvement, but also no warning uptick. As seen below, the year-over-year metrics are still running above the 2% Fed target.

Source: Oxford Economics/Haver Analytics

A secondary measure of confidence put out by Gallup also shows we are not fully believing the strength of the economy. As you see below, we are still not back up to the post-pandemic highs.

    Source: Gallup

Digging deeper

Personal income is hanging in there, and jobless claims continue to be low. As a job is one of the most important factors in people feeling comfortable with spending, why are people not confident?

There are many moving parts here, but let’s take a look at a few. First, how is inflation impacting low-income households? As you see below, they spend more than 59% on essentials such as food and housing.

 Source: BLS Consumer Expentiture Survey

However, high-income households only spend 40% on these two categories. This allows them more disposable income for non-essentials.

Second, in order for many households to continue to spend, they are relying on debt. The chart below shows the increasing burden of interest payments. 

Third, while we have been experiencing lower prices at the pump, this bottomed out earlier this year, and as you see below, has been on the rise. Most everyone has a car to fill up, and this can weigh on your confidence if you see consistently higher numbers costs here.

Source: Bloomberg American Automobile Association (AAA)

Finally, the increasingly polarized political environment can add to the uncertainty that families face. Any uncertainty is bad, and with this increasing on multiple fronts, the consumer may start to pull back on spending.

Economic releases

Last week we had consumer confidence releases and the PCE inflation indicator. No major surprises. Fed “talking heads,” following the March FOMC meeting, seem to be saying higher for longer.

This week’s calendar, we have employment information galore. The highlight will be the non-farm release on Friday, but watch the quits data from the JOLTS release for clues to the future. See below for details.