As consumers, we are a fickle bunch. Job prospects, high gasoline prices, rising interest rates, war in Ukraine, COVID-19 and politics are just some the headwinds faced by the largest share of the American economy — consumption.
In March, consumer confidence about the next six months fell to its lowest level in at least six years. The April data will be released on Tuesday in the week ahead. A further drop in future optimism should not be a surprise to investors.
After all, a separate survey showed waning economic cheeriness, but also included a hint of hopefulness. The University of Michigan Consumer Sentiment Index fell to a decade low last month. Yet, preliminary data from April indicates a sharp rebound in confidence, driven in part by gasoline prices falling from their recent highs.
But don’t assume April’s improving attitudes point to consumers gaining economic enthusiasm. As the chief economist for the University of Michigan survey Richard Curtin cautions, “The April survey offers only tentative evidence of small gains in sentiment, which is still too close to recession lows to be reassuring.”
Weighing on consumers is what is weighing on investors: the twin challenge of high inflation and rising interest rates. Both pressure consumer spending plans in the future. And neither is expected to abate meaningfully soon.
Wages are catching up to inflation, not fueling it — not yet. Real hourly earnings in March fell from a month earlier thanks to inflation sucking up any pay boost and then some. New income and spending data will be released Friday. That data also will include the Federal Reserve’s favored inflation gauge.
While consumers are wary about inflation, they are confident about wages. And that worries investors and the Fed. If shoppers are convinced of bigger paychecks, they won’t mind paying higher prices, which feeds demands for higher wages. Economists call this the wage-price spiral.
So, growing confidence in higher pay coupled with the growing concern of higher inflation and rising interest rates. It creates confusing crosscurrents for consumers and investors.
