The Year of America’s Cranky Consumer: Low Confidence, High Spending

Despite a seemingly robust economy, American households are ending the year “feeling a lot more dour about the economy than they did at the beginning, even as they keep spending,” according to an analysis in The Wall Street Journal. The widespread anxiety stems from a combination of high prices, a fragile job market, and general uncertainty, pushing consumer morale to near historic lows.

The chief measure of this discontent is the University of Michigan Surveys of Consumers. At the start of the year, the sentiment index stood above 70 in January. By early December, however, a preliminary monthly reading showed sentiment hovering only slightly above 53. This reflects a steep decline, closing in on the all-time low of 50 recorded in June 2022, when inflation peaked shortly after the war in Ukraine began. High prices and a failure to psychologically adjust to post-pandemic increases are major drivers of the persistent gloom. “People are not feeling confident about the economy,” said Joanne Hsu, director of the surveys, who also noted that Americans are “still looking back to prices they paid before the Covid-19 pandemic and struggling to digest the increases since then.”

The lingering impact of inflation is a primary concern. While consumer prices rose 3%  from a year earlier in September—a significant drop from the peak above 9% in mid-2022—Americans remain frustrated by the persistently higher cost of goods and services. Prices continue to rise faster than the Federal Reserve’s 2% target. As Bradley Saunders, North America economist at Capital Economics, told The Wall Street Journal, “The broader picture is inflation hasn’t come down as quickly as households hoped.” This frustration is palpable in individual stories, such as that of Luana Molley, a hotel housekeeper in Atlantic City, N.J., who is struggling after her rent increased by $200 and utility bills soared.

The paradox of low confidence coinciding with solid retail performance is defined by income disparity. The Wall Street Journal notes that weak sentiment readings do not mean Americans are not spending, citing solid holiday shopping reports from retailers like Walmart and T.J. Maxx. However, the spending is uneven: less-affluent households are “pulling back on routine purchases to give priority to things they need sooner,” while upper- and middle-income consumers continue to “race ahead.” This split suggests a highly fractured economic experience.

On a hopeful note, consumers are beginning to adjust their forward-looking expectations. The Michigan survey showed consumers expect 4.1% inflation in the year ahead, a decrease from the 4.5% they anticipated in November. This marks four straight months of decline in long-run inflation expectations, an improving trend that suggests some consumers see relief on the horizon, even if their current mood remains “cranky.”

Source:

The Wall Street Journal