Consumers, as we say all the time on this program, drive this economy. Their spending accounts for around 70% of GDP. And right now, they are not feeling great about this economy.
On Tuesday, the Conference Board reported that its Consumer Confidence Index fell in August. Americans are getting less optimistic about their future income, and they aren’t sanguine about business and labor-market conditions going forward. In fact, both of those metrics in the Conference Board survey are sitting below the threshold that typically signals a recession is coming.
That lines up with the University of Michigan’s index of consumer sentiment, which deteriorated this month — from a level that was already pretty mediocre. Worries about tariffs and inflation, and both of them eroding personal finances, drove the downturn. And yet, consumers won’t necessarily be pulling back on spending and hunkering down at home in a miasma of gloom and doom.
For a while now, Americans have been getting more worried about their ability to keep a job and earn a paycheck. Stephanie Guichard at The Conference Board said every month since the beginning of the year, “We see a decline in the share saying that jobs are plentiful, an increase in the share saying that jobs are hard to get.”
Consumers are also worried that tariffs will drive up prices and squeeze household finances. They say they plan to spend less going forward.
“For big-ticket items, but also for services, like going on vacation, going to restaurants,” said Guichard.
Except, these plans to be more frugal? Guichard said we’ve heard them before.
“I mean like a year ago, they were telling us they were going to be cautious, and at the end of the day they were not,” she said.
Instead consumers kept spending it up.
“And the main reason is, as long as U.S. consumers have a job and have income, they tend to spend it,” said Guichard.
But here’s the thing: It really matters which consumers we’re talking about, said John Leer at polling firm Morning Consult.
“Consumer sentiment across the income groups is as wide as it has ever been. High-income folks have roughly returned back to where they were prior to the start of the pandemic, which is really remarkable,” said Leer. “Low-income folks, on the other hand, are basically back to where they were at the depths following the initial onset of the pandemic.
It partly comes back to those increasing worries about the labor market. They’re concentrated among lower- and middle-income consumers, whose jobs are most vulnerable to a downturn. These consumers are pretty much treading water — spending most-everything they earn every month on what they need. But they’re not the ones who keep pushing consumer spending higher.
“We know that spending growth is almost entirely being driven by high-income folks,” said Leer.
Who have evermore spending power — from rising incomes, and rising wealth from stocks and homeownership.
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