Consumer Confidence Cools Despite Lower Inflation, Energy Prices

Consumer Confidence Cools Despite Lower Inflation, Energy Prices
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The brief bout of optimism seen among U.S. consumers in August has dissipated. Americans have grown increasingly concerned about the state of their income, investments and job prospects.

The most recent Ipsos-Forbes Advisor Consumer Confidence poll was 49.9, down 2.2 points since the prior reading and more than 10 points below the last pre-Covid 19 poll in early March 2020.

Especially concerning is the 10-ton gorilla that’s been firmly planted in the room since early 2021—inflation.

“[C]onsumer sentiment has reverted back to levels observed throughout much of the summer,” James Diamond of Ipsos said. “Despite the drop in gas prices, six in 10 Americans still believe inflation will continue to rise over the next year.”

The latest Ipsos-Forbes Advisor poll came amid a volatile period in markets following Federal Reserve Chair Jerome Powell’s tough inflation speech at the Jackson Hole conference in late August.

There was one bright spot in the Ipsos confidence survey, however: The Expectations sub-index was the only component of the survey that did not decline, instead rising slightly to 59.5.

The Bear Market Rally Is Over

After enduring a miserable start to 2022 and plunging into bear market territory, the U.S. stock market had a brief summer resurgence, gaining 17% in the two months through Aug. 16.

Ten days later, Powell strongly reiterated the Fed’s commitment to quashing high inflation. Wall Street grew despondent and stocks declined 7% through the end of August, per CFRA chief investment strategist Sam Stovall.

Americans noticed the stock market reversal.

The Investment sub-index dropped nearly five points from the prior iteration to 39, more than nine points below its pandemic average and almost 16 points less than early March 2020.

Investor feelings match market results: The S&P 500 has fallen roughly 16% year to date, while bonds are down a breathtaking 11%.

“[F]for the near term at least, pain will be the name of the game,” said Stovall.

The chief inflicter of that pain is the Fed. The central bank started the year by telling markets that not only would the central bank raise interest rates, but it would also reduce the size of its balance sheet, a maneuver known as quantitative tightening.

The era of cheap money appears to be over, and stock traders are dealing with the hangover.

Inflation Remains Sticky

The reason for the Fed’s hawkish turn is inflation.

While the headline consumer price index (CPI) moderated slightly in July, prices were still 8.5% higher than they were 12 months ago. Thankfully, gas prices declined compared to June, but food prices rose.

The good news on energy prices may be short-lived, unfortunately. Oil prices are down from summer highs, but OPEC+ members recently announced they would cut production by 100,000 barrels a day. Meanwhile, the Russo-Ukrainian war continues, and California may have to impose rolling blackouts.

The Fed prefers to look at so-called core inflation measures, which strip out volatile food and energy prices. These numbers are likewise concerning. The core personal consumption expenditure price index (PCE) is the Fed’s preferred gauge—core PCE inflation is currently at 4.6%. Last July, it was one full percentage point lower.

“The Fed has indicated they are willing to raise interest rates as high as needed to bring inflation down to their stated goal [of 2%],” said Robert Gilliland of Concenture Wealth Management. “Consumers will likely be tested in the next several months (or longer) to come as the Fed works through the process.”

This test isn’t bringing consumers joy. According to the Ipsos-Forbes Advisor poll, 63% of respondents believe the amount they pay on monthly bills and other regular expenses will go up. That’s a 6 percentage-point increase compared to just a month ago.

Only 4% said they think their costs will decline.

Signs of Strength in the Broader Economy

One reason the Fed feels empowered to raise interest rates is the labor market’s strength.

Employers added 315,000 workers in August after adding 526,000 in July and 293,000 in June. The unemployment rate increased slightly to 3.7%, but that was largely due to a good reason: More people got off the sidelines and entered the job market.

Meanwhile, the JOLTS survey shows more than 11 million open positions, about four million more than before the pandemic.

Yes, the economy declined in the first two quarters of 2022, but a broader look at the economy leaves the impression that we are not currently in a recession.

Nevertheless, Americans remain a bit nervous.

The Jobs sub-index of the Ipsos-Forbes Advisor survey remains the strongest subsection of the poll, although it declined by nearly two points from two weeks ago.

That may be due to a slate of large companies announcing cutbacks from Re/Max to Netflix.

Americans may have considered the rising cost of doing business, the Fed’s dedication to higher rates and weak economic growth, and surmised that maybe their gig isn’t as secure as they believed just a short while ago.

Whether that fear is realized remains to be seen.

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