Consumer confidence plummets despite economic expansion


Key points to remember

  • The consumer confidence index fell 4.5 points between May and June to its lowest level since February 2021 (98.7)
  • Despite weak consumer confidence, the economy continues to expand, with orders for durable and non-military capital goods increasing month-over-month
  • Currently, economists seem to be saying we’re not due for a recession (or a mild one, at most) – although the confidence index suggests consumers think otherwise.
  • Meanwhile, investors and analysts believe S&P 500 companies will see revenue and earnings rise in Q3/Q4 2022

Consumer confidence hit a new 16-month low in June, according to a new Conference Board report. Their Consumer Confidence Index, which tracks consumers’ assessments of current conditions and near-term prospects, fell 4.5 points month-over-month.

Despite reports of growing pessimism and recession fears among consumers, the economy continues to grow. And while some economists believe the risk of a mild recession is rising, others believe a mild economic slowdown is more likely.

Here’s what it all means for investors.

The latest news from the Consumer Confidence Index

The overall consumer confidence index fell 4.5 points from 103.2 in May to 98.7 in June. Currently, it sits at its lowest point since February 2021, suggesting that consumer attitudes are deteriorating on the economy.

The Conference Board also publishes the Current Situation Index, which gauges consumer sentiment on business and labor market conditions. This index slipped slightly from 147.4 to 147.1 as the number of consumers declaring:

  • The economic situation is “bad” fell from 21.7% to 23%
  • Jobs are ‘abundant’ slipped from 51.9% to 51.3%
  • Jobs are ‘hard to get’ fell from 12.4% to 11.6%

But it was the expectations index that took the hardest hit, plunging from 73.7 to 66.4 to land at its lowest level since March 2013.

The Expectations Index examines consumer opinions on half-year earnings, business and labor market results. The sudden drop in the index suggests that consumers are more pessimistic about future conditions, including their own financial outlook.

According to the June survey, the number of consumers who believe that business conditions will improve rose from 16.4% to 14.7%. Meanwhile, the number of consumers who think business conditions will deteriorate has fallen from 26.4% to 29.5%.

The index recorded similar results for employment and income expectations.

Currently, 16.3% think more jobs will become available (vs. 17.5%), while 22% expect fewer vacancies (vs. 17.9%).

Meanwhile, the number of consumers who believe their income will increase has fallen from 17.9% to 15.9%. 15.2% now believe their income will decrease, compared to 14.5% previously.

Where low consumer confidence hits hardest

Lynn Franco, senior director of economic indicators at the Conference Board, says weak consumer confidence is hitting large discretionary purchases the hardest.

In particular, “purchase intentions” for cars, homes and appliances have fallen since the start of 2022 and will likely continue to fall. Consumer spending on discretionary spending like vacations and travel is also down.

Already, 54% of potential vacationers say they have changed their plans to minimize price tags, with the changes impacting:

  • Destination planning
  • Flight
  • Choice of accommodation
  • Catering and catering budgets
  • Gift and Holiday Shopping

Franco cites 40-year high inflation and the Federal Reserve’s increasingly aggressive rate hikes as the main reasons for lower spending. She also predicts that rate hikes and inflation will weigh on spending and economic growth for the rest of the year.

Despite declining optimism, expansion continues

Consumer sentiment continues to paint a grimmer picture of the economy all the time. But a few key metrics suggest the economy is not contracting, but rather expanding.

For example, a government report shows durable goods orders rose 0.7% in May. (“Durable goods” refers to products that last more than 3 years such as cars, heavy machinery, appliances and electronics.) Shipments of manufactured durable goods also increased by 1.3%, while new orders for non-military capital goods rose 0.5%.

May’s stronger-than-expected readings suggest manufacturers continue to see strong demand in the face of economic headwinds. And a late June report from the Kansas City Fed indicates that while regional growth is slowing, demand continues to outstrip supply amid ongoing supply chain issues.

Although some consumers see a bleak future, many remain optimistic thanks to the strongest US labor market in decades. Unemployment so far remains near pre-pandemic lows as businesses continue to hire. And while some companies — especially in tech — are laying off employees, layoffs also remain at record highs.

As Amherst Pierpont Securities Chief Economist Stephen Stanley notes: borrowing and uncertainty about the economic outlook are increasing.

So why are consumers so pessimistic?

If the business outlook remains strong, why is consumer confidence falling?

One likely reason is that while some numbers show economic expansion, high inflation and rising interest rates continue to weigh on consumer incomes.

Granted, wages have increased significantly over the past two years, but most have not matched the 8.6% annual inflation we are seeing now. These effects are compounded by the fact that basic necessities (including the prices of food, gasoline, vehicles and rent) have increased astronomically.

At the same time, multiple successive rate hikes, courtesy of the Federal Reserve, made borrowing more expensive. If the Fed’s aggressive course continues, some fear it could tip the economy into a recession.

And when it comes to this increase in manufacturing demand, the Dallas Federal Reserve warns against counting our chickens too soon.

While May’s numbers are strong, an early June survey of Texas industry executives suggests we’re on the cusp of a sharp downturn triggered by weakening demand. Although ongoing labor and supply shortages boosted demand in the spring, rising inflation and interest rates are forcing many businesses to cut spending this summer.

What are investors saying?

Through all this consumer confidence and economic hubbub, investors have their own minds. Current data suggests that investors remain broadly optimistic about the economy, with many analysts predicting earnings growth for S&P 500 companies will see continued growth through 2022.

Still, some warn that poor consumer confidence numbers could become a self-fulfilling prophecy as spooked consumers cut back on spending. If consumer activity declines enough, recession fears could, ironically, be the catalyst that triggers a recession.

Many defensive stocks have already traded in 2022 on these fears, with utilities and healthcare leading the way. Meanwhile, dynamic stocks — especially tech giants — suffered huge price declines.

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The evidence for – and belief in – an impending recession is becoming increasingly mixed. Some economic data shows the economy expanding, while consumers are increasingly pessimistic as 2021 optimism fades. Meanwhile, investors and analysts continue to hope the companies have even more growth potential.

In other words, it’s a confusing time to be an investor.

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