Consumers can live with higher inflation, according to the Conference Board’s latest Consumer Confidence survey, but can the Fed?
Its survey of U.S. consumer confidence jumped to a 17-month high of 109.7 in June, reflecting a slowdown in inflation and fewer worries about a recession, per its release. The important index of consumer thinking increased 7.2 points from a revised 102.5 in May, the Conference Board said Tuesday. It was the lowest in six months.
The Fed has lived with high inflation before, during more prosperous times. But since 1980 and the Volcker era as Fed Chairman it hasn’t tolerated any inflation rate much above 2 percent, as the FRED graph dating from 1950 makes clear. (Gray bars are recessions.)
That was also when salaried employees had a larger share of the economic pie—from the 1950s to 1970s. But then oil and oil embargoes became a political football, and Big Business decided it wanted a larger share of the economic pie.
Inflation then declined during an era of ‘great moderation’ after 1980 and employees behaved themselves as they lost their bargaining power when so many higher-paying union jobs fled overseas.
There is a reversal of fortunes happening since then thanks to the COVID pandemic when private industry stopped investing and governments had to step in to spur the recovery.
Workers’ salaries are surging, hence the rising confidence of consumers in the latest surveys.
“Consumer confidence improved in June to its highest level since January 2022, reflecting improved current conditions and a pop in expectations,” said Dana Peterson, Chief Economist at The Conference Board. “Greater confidence was most evident among consumers under age 35, and consumers earning incomes over $35,000.
“The expectations gauge continued to signal consumers anticipating a recession at some point over the next six to 12 months,” said Peterson, “but considerably fewer consumers now expect a recession in the next 12 months compared to May.”
Why the dichotomy in consumer thinking? Because we all know the Fed’s propensity to keep raising interest rates, as long as they believe any inflation rate above 2 percent endangers economic growth. And there is a growing consensus that further rate hikes will plunge US into a short recession, at least.
The University of Michigan’s sentiment survey that economists also look at showed more optimism.
Its index lifted 8% in June, reaching its highest level in four months, “reflecting greater optimism as inflation eased and policymakers resolved the debt ceiling crisis,” said survey director Joanne Hsu. “Sentiment is now 28% above the historic low from a year ago and may be resuming its upward trajectory since then,” she said.
The bottom line is that consumers have become wealthier since the pandemic, and are showing it in their buying habits by dining out and traveling more.
The bottom 50 percent, generally households with net worth of $166,000 or less before the pandemic, now hold a bigger share of the nation’s wealth than they’ve had for 20 years, the Federal Reserve estimates. Their collective net worth, $3.73 trillion, has almost doubled in two years and is more than 10 times higher than in 2011, the nadir after the last recession.
So why shouldn’t we be happier?
Harlan Green © 2023
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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