Declining Consumer Confidence and Its Impact on the US Economy
Signs of trouble are spreading into key consumer segments
The Conference Board's Consumer Confidence Index (CCI) is a critical economic indicator, providing insights into consumers' perceptions of the economy's health.
It is based on a monthly survey that measures consumers' attitudes towards current and future economic conditions, including business conditions, labor markets, and income prospects.
A decline in consumer confidence can have significant implications for an economy driven by consumption, potentially leading to a slowdown or even a recession. In April, the CCI fell to 101.3, with the Expectations Index also dropping considerably.
Decline in Consumer Confidence
The decline in consumer confidence can be attributed to growing pessimism about the outlook for business and labor market conditions. In April, fewer households expected business conditions to improve, and more expected worsening conditions over the next six months. Additionally, there was a decline in the number of consumers expecting more jobs to be available in the short term.
Notably, the decline in consumer confidence was more significant among consumers under 55 years of age and households earning $50,000 and over. This suggests that the economic concerns are not limited to low-income households, but extend across various age groups and income levels, a worrisome sign.
Factors Contributing to the Decline
There are several factors contributing to the decline in consumer confidence:
Slowing Retail Sales: A drop in retail sales is an indication that consumers are spending less, which can impact overall economic growth.
Dropping Consumer Discretionary Spending: As consumers cut back on discretionary spending, businesses that rely on these purchases, such as restaurants and entertainment venues, may suffer.
Living Paycheck-to-Paycheck: With two-thirds of consumers living paycheck-to-paycheck, many households have little room for unexpected expenses or financial emergencies, increasing their vulnerability to economic shocks.
Struggling with Bills: As 40% of consumers struggle to pay their bills, it is a clear indication that many households are facing financial difficulties, which can impact their spending habits.
Tightening Credit: As financial institutions tighten credit, it becomes more challenging for consumers to borrow money, further constraining their spending.
Rising Rates: Higher interest rates can make borrowing more expensive, leading to reduced consumer spending and business investment.
Falling Leading Economic Indicators: Eleven consecutive months of falling leading economic indicators suggest a potential recessionary environment, which can further dampen consumer confidence and spending.
Impact on the Economy
With consumption being a significant driver of the US economy, accounting for about 68.5% of GDP on average, a decline in consumer confidence can have serious consequences for economic growth.
As consumers become more pessimistic about the economy's future, they are likely to cut back on spending, leading to reduced demand for goods and services. This can result in businesses scaling back production, laying off workers, and investing less in new projects, ultimately slowing down economic growth.
Furthermore, the decline in consumer confidence may be a precursor to a potential recession, which can have wide-ranging impacts on employment, income, and overall economic well-being.
As businesses struggle and lay off workers, the unemployment rate may rise, leading to reduced consumer spending and a downward spiral of economic activity.
Looking Ahead: GDP and the Economy
As we await the GDP results this Thursday, a GDP reading just above 1% could signal that the economy is indeed slowing down, with a potential recession looming on the horizon.
It’s especially important to examine the components that are driving GDP. the Q4 2022 reading demonstrated that inventory growth, exports falling less than imports, and non-defensive government spending drove the economy’s 2.6% quarterly growth. These are not the foundations on which a healthy economy would grow from.
In conclusion, the decline in consumer confidence is a critical indicator of the economy's health, and it is essential to understand the factors contributing to this decline. As consumers' pessimism about the economy grows, they are likely to make more conservative spending decisions. Reigning in discretionary spending and focusing on the necessities.
This tends to reduce economic growth, and ends up being a bit of a self-fulfilling phenomenon. But more importantly, we are already seeing a weakening economic environment and with consumers showing signs of pulling back more meaningfully, the likelihood of a recession rises.