Are Consumers Worse or Better Off Than 18 Months Ago?
Why Don’t They Think So?
This week’s headlines… Consumer confidence fell to a decades-level low. Granted, there are multiple measures of consumer confidence out there. This one, the University of Michigan’s Index, is one of the most trusted. And it fell to 66.8 from 77.1 in October. I want to point something out here. This is the lowest mark recorded on this index since 2012. It is lower than the darkest days of the pandemic (April 2020—when global stock markets had lost $7 trillion in value and GDP levels across the world surged to negative double digits in a global, record-breaking orgy of economic despair that quarter).
This should seem farcical, but it is real. According to two of the three most prominent consumer confidence indices, consumers feel more challenged today, than they did in mid-April 2020 when the global stock markets had lost $7 trillion of wealth and at a time in which at least 20 million American workers had either lost their jobs permanently or temporarily. Seriously. I do not say this to say that two of the top three indices are wrong. The third, the Conference Board’s CCI Index had confidence climbing to 113.8 from 109.8 in September. But all these indices are on different reporting timetables. And, you know where I think the Conference Board numbers are going to go on their next report? Ugh, down.
So, yes, consumers are increasingly glum. What does the fact that they are more pessimistic now than at the depths of the CoVid-19 recession, tell us?
It tells us that they are deeply concerned about inflation. That is a no-brainer. The latest CPI numbers indicate a 6.2% year-over-year jump in pricing. These numbers reflect mind-numbing sticker shock for things like gasoline, meat, milk and other staples.
What they do not reflect is any sort of consumer introspection. And the numbers prove it.
While the “Quit Rate” sounds inherently negative—and it is to employers with a worker shortage), it is another number that came out last week that set records Roughly 4.4 million Americans quit their jobs in September. But the Quit Rate reflects a strong job outlook, not a weak one. Workers do not quit their jobs unless they’re confident they can land a new one. And they can.
This same report from the Bureau of Labor Statistics (the JOLTs report—Job Openings and Labor Turnover) also showed that there were over 10.4 million available jobs in September.
A couple of things to remember here; first, the JOLTS report lags the unemployment and job growth numbers by a month. So many of September’s jobs quit were October jobs hired; we hired 531,000 people last month bringing unemployment down from 4.8% to 4.6%. But we still had 4.4 million fewer workers in October 2021 than in February 2020 (pre-pandemic).
Is that the reason for glumness? Probably not. We had about four million workers drop out of the workforce during the pandemic. Mostly these were people that could take early retirement, in what was initially a deeply recessive economy. One, where a recently laid off 63-year-old in the services would be foolish not to consider early retirement. At least, in the early days.
But then came stimulus. The Federal Reserve propped up the stock market by buying billions in bonds monthly; that tapering is only now starting to occur. The $7 trillion in market wealth lost by mid-April 2020 was regained by August 2020 and was up roughly 40% at this writing. But that is the investor class. We had a wealth inequity problem prior to the pandemic, it was accelerated during it.
It is not just that investors made out over the last 20 months, but those that were able to work from home also generally made out. The pandemic as accelerant has become the common theme for interpreting its impacts; but nowhere was this clearer than in the economics of the pandemic. The unemployment rate for those with just a high school diploma peaked at 17.3% (April 2020). It now stands at 6.7%. For those with less than a high school diploma, it peaked at 21.0% and is now at 8.2%. If you had a college degree? The worst unemployment you faced was 8.4% and now it is 3.7%. Most economists view anything below 5.0% as full employment.
So now we have a record number of job open (remember the JOLTS numbers are a month behind, so the number of available jobs in September probably fell in October). We also have a record number of workers willing to quit their jobs (generally because they feel or know they can line something else up better). And we also have the largest wage growth in 20 years.
Beyond that, we also have consumers sitting on over $5 trillion more in their checking accounts than before the pandemic (according to the Federal Reserve). The $7 trillion we spent on stimulus wasn’t just on propping up the investor class by buying bonds. Adjusted for inflation, we spent about $5.7 trillion on world war two. That said, we put real money in the hands of consumers. Savings rates have been up significantly during the pandemic (though those have been falling with a return to normalcy—a return to credit card spending has also begun to occur after months of consumers paying off debt). But consumers are simply sitting on a lot more money than they were prior to the pandemic.
Which is why retail sales are up. SIGNIFICANTLY!
First, whenever you see retail sales numbers the media usually focuses on the better clickbait number. Sometimes they report the monthly increase, sometimes the annual. Guess what? Right now, both of those are just noise. Throw 2020 out as a gap year. And monthly improvement since then, while more stable, also means little.
Let’s compare retail sales for September 2021 (latest available) against September 2019 (the last “normal” year). They are up 20.6%. For the previous decade, they had averaged between 2.0% and 3.0% annually. If consumers are broke, they certainly aren’t showing it.
Simply put, the reason consumer confidence is in the toilet is inflation. We feel more pain taking money out of our wallets than the amount of pleasure we feel when money goes in.
The challenge is this; at what point does this start to shape consumer behavior?
This usually will eventually happen. But it often depends on an extended timeline. And near-term fluctuations do not always directly impact consumer spending. They are certainly related, but it can be a loose relationship.
If you just look at the consumer confidence numbers alone, it would be easy to assume we are in major trouble. That said, I would guess that at least few of the hundreds of thousands of retail workers that quit their jobs in just the last couple of months would agree with me—sometimes the customer is just not always right.
In this case, the overall economic numbers outweigh the negative sentiment (FOR NOW). We may be in the highest inflationary period in decades, but we are also in the highest wage growth era in decades. That does not mean that perception cannot become reality. It often does. Usually for bad reasons and with bad outcomes.
But would I bet against the consensus forecasts of, inflationary and supply chain issues aside, retail posting Holiday Shopping Season gains in the double-digits? No way. I would double down on that bet. Never take seriously anyone’s money complaints unless you can see their actual books.
See you next week,
Garrick
