By: Dr. M. Ray Perryman
Published in syndication June 15, 2022
The latest surveys of consumers indicate that, as a whole, we are becoming a less optimistic lot. Because our spending on goods and services normally represents around 70% of the economy, that is a source of some concern (although, strangely, our confidence level and our outlays have not been particularly correlated over time).
It's an unusual dynamic to have confidence sagging even as the economy adds jobs at a brisk pace and shows other signs of strength. Usually, the big dips occur during recessions.
The monthly series maintained by the University of Michigan recently reached its lowest recorded level, as bad as the worst of the 1980 recession. Respondents' assessment of their personal finances dropped significantly, and feelings about business conditions in the next year slumped even further. The primary culprit? Inflation.
Inflation has reached the highest level in 40 years. Few people are unaffected by major jumps in prices for gasoline, groceries, and virtually everything else. Even as wages rise, they're not keeping pace. Consequently, many households are falling behind. The problems this time around stem from a perfect storm of factors coalescing at once, but they do not reflect the institutional forces that created systematic, long-term inflation that plagued the 1970s and early 1980s.
Although much of it was essential, the trillions in stimulus packages during the pandemic have increased liquidity and stimulated spending as we resume more normal activity. Supply chain challenges and the Russian invasion of Ukraine also pushed up prices. Workforce challenges and recent shutdowns in China have made things worse. These issues are largely transitory and being addressed, but it will likely take a few months.
The Federal Reserve is reducing liquidity and is engaged in a series of substantial rate hikes. The goal is to slow things enough to cool price increases, but not too much. It's a delicate balance that requires the Fed to be nimble.
Consumers often change their minds fairly quickly, and a few positive developments could easily shift perceptions. Although some parameters are difficult or impossible to control (such as the conflict in Ukraine), many others are not. Oil production has recently set records in the Permian Basin (the largest US oilfield) and is increasing rapidly. It is also rising in other major US formations as well as other parts of the world. Recent trade data indicates that the pace of bringing goods into commerce is improving, which helps with supply chain bottlenecks. These efforts will not curtail inflation overnight, but they will bring improvements in the coming months (not years).
The good news is that the underlying economy continues to expand. As we begin to see some inflation relief, consumer confidence should rebound. Chin up! Stay safe!
- Tags: consumer confidence, inflation