Chris Kuehl
Managing Director • Armada
A cursory look at the headlines will likely leave you a bit confused. On the one hand, there are reports of mounting consumer fear and trepidation over everything from the job market to inflation, economic growth, tariffs, taxes, etc. At the same time, there are data releases that do not reflect this same level of gloom and doom. The inflation rate is a bit higher than it was, but at 2.9% it remains in the category of “creeping inflation” and is still not that far from the Fed’s goal of 2.0%. The rate of unemployment is still near historic lows at 4.3% and the quit rate is still at 2.0%. The latest data on third-quarter growth asserts the economy is moving along at a 3.9% pace and that is nearly twice the speed of growth over the last twenty years. Which of these impressions is correct? Are consumers talking themselves into a recession mindset? Has the media drumbeat of gloom and doom convinced people that everything is broken? Or has the data not caught up with reality? Will the data we see in Q4 reflect the grim outlook that people seem to have right now?
It has been said that perception is reality, and there have been hundreds of situations where the economy has been performing far better than most people assumed. There have also been many situations when the economy was strained, but people didn’t seem to notice. The threat is that people will start to act on their fears and concerns, and this becomes a self-fulfilling prophecy. This is particularly worrisome in a nation that is as dependent as the US has been on consumer activity. Consumption still accounts for over 70% of the nation’s GDP. If the average consumer starts to believe that major financial distress is imminent, they will tend to restrict that consumption, and when those who are driving 70% of the economy elect to slow the result they fear becomes reality.
There are three factors that impact consumer attitude. The first is inflation, but this impacts some far more than others. For those in the higher income categories, the rise in costs will essentially be an annoyance but will not seriously affect spending. This is why those in the upper third of income earners are driving the majority of the growth. Those in the other two-thirds have been more significantly affected by inflation (85% are living paycheck to paycheck). The second major influence is job security. If there is an increase in layoff activity, the consumer starts to behave more frugally. At the moment, there has been little indication of mass layoffs tied to the performance of the economy, and the existence of a skilled labor shortage has kept many companies from laying off people. The third factor affecting consumer attitude is more subjective – confidence in the future. A steady drumbeat of negative news will tilt opinion in that negative direction. Politics plays a huge role here as well. The party in power will attempt to paint a rosy picture regardless of the real situation, while the opposition paints a picture of distress and deterioration. The consumer is not sure what to accept as accurate. Thus, we come back to data. Most of what the numbers are telling us is that the economy is doing reasonably well. We just have to decide what is real.
