How Americans Feel about the Economy - The Looming Consumer-Driven Recession

A recent poll by the National Opinion Research Center at the University of Chicago with funding from the Wall Street Journal looked at how Americans feel about the current economic situation in the United States.

  

The interviews involved 1,071 adults between May 9th and 17th, 2022 and had a margin of sampling error of plus or minus 4 percentage points at the 95 percent confidence level.  Let's look at some of the questions and responses:

 

1.) Would you describe the state of the nation's economy these days as...?

 

Excellent - 1 percent

 

Good - 16 percent

 

Not so good - 55 percent

 

Poor - 27 percent

 

In total, 83 percent of respondents described America's economy as poor or not so good, nearly 5 times as many as those who described America's economy as excellent or good.

 

2.) During the last few years, has your financial situation been getting better, worse, or has it stayed the same?

 

Better - 24 percent

 

Worse - 38 percent

 

Stayed the same - 39 percent

 

3.) The way things are in America, people like you and your family have a good chance of improving your standard of living - do you agree or disagree?

 

Strongly agree - 4 percent

 

Somewhat agree - 22 percent

 

Somewhat disagree - 26 percent

 

Strongly disagree - 19 percent

 

In total, 46 percent of Americans felt that their families did not have a chance of improving their standard of living compared to 26 percent who believed that their families could improve their standard of living.

 

4.) In In general, do you think this is a good time, a bad time, or neither a good time nor a bad time to...

 

a.) Buy a home?

 

Very good - 3 percent

 

Moderately good - 38 percent

 

Neither good nor bad - 21 percent

 

Moderately bad - 34 percent

 

Very bad - 31 percent

 

In total, 65 percent of Americans felt that it was either a moderately bad or very bad time to buy a home compared to 13 percent of Americans feel that it is either a very good or moderately good time to buy a home.

 

b.) Invest in the stock market?

 

Very good - 3 percent

 

Moderately good - 18 percent

 

Neither good nor bad - 34 percent

 

Moderately bad - 26 percent

 

Very bad - 3 percent

 

In total, 44 percent of Americans felt that it was either a moderately bad or very bad time to invest in the stock market compared to 21 percent of Americans feel that it is either a very good or moderately good time to invest in the stock market.

 

5.) Thinking about your financial situation, how confident are you that...

a.) You could pay for a large expense such as a downpayment on a home or purchasing a new car?

 

Extremely confident - 8 percent

 

Very confident - 11 percent

 

Somewhat confident - 20 percent

 

Not very confident - 25 percent

 

Not confident at all - 35 percent

 

In total, 60 percent of Americans were either not very confident or not confident at all that they could pay for a large expense compared to 20 percent of Americans who were either extremely confident or very confident that they could pay for a large expense.

 

b.) You will have enough savings for retirement?

 

Extremely confident - 7 percent

 

Very confident - 10 percent

 

Somewhat confident - 26 percent

 

Not very confident - 27 percent

 

Not confident at all - 29 percent

 

In total, 56 percent of Americans were either not very confident or not confident at all that they will have enough savings for retirement compared to 17 percent of Americans who were either extremely confident or very confident that they would have enough savings for retirement.

 

c.) You would be able to pay an unexpected bill of $1000?

 

Extremely confident - 25 percent

 

Very confident - 16 percent

 

Somewhat confident - 21 percent

 

Not very confident - 15 percent

 

Not confident at all - 22 percent

 

In total, 38 percent of Americans were either not very confident or not confident at all that they would be able to pay an unexpected bill of $1000 compared to 41 percent of Americans who were either extremely confident or very confident that they would be able to pay an unexpected bill of $1000.

 

Let's close by looking at some data which may help explain the pessimistic responses of Americans to their personal financial situation.  Here is what has happened to the personal savings rate over the past five years:

 

The major increase in the savings rate in 2020 was due to the pandemic payments made to American households which has long since evaporated with the current savings rate of 4.4 percent being the lowest since September 2008.

Here is a graph from FRED showing that revolving consumer debt has reached a new all-time high of $1.103 trillion in April 2022 after falling back during the pandemic-related recession in 2020 and 2021:

 

Here is a graph from FRED showing that nonrevolving consumer debt has reached a new all-time high of $3.464 trillion in April 2022:

 

If you look at the Consumer Credit G.19 report for April 2022 released by the Federal Reserve, you'll notice that growth in total consumer credit has far outstripped the headline inflation numbers over the period from February to April 2022 with revolving credit rising by up to 29 percent for the month of March 2022:

 

With the rise in interest rates showing no sign of abating, America's already beleaguered and pessimistic consumers are going to find themselves in an even more dire financial condition since their pandemic-related savings have disappeared and they have taken on debt like there is no limit to what they can spend.  Given that U.S. economic growth is pinned to spending by consumers, it is looking  increasingly likely that a consumer-driven recession lies just around the corner.

Consumers and the Health of the American Economy

As shown on this graph, consumer spending is a key part of the economy in the United States today, making up just under 69 percent of GDP:

According to the University of Michigan Consumer Sentiment index, consumers are a happier bunch than they were during the depths of the Great Recession as shown here:

Unfortunately, as you can quickly deduce, consumer sentiment is still well below levels seen during the recoveries after the 1980 - 1981, 1991 and 2001 recessions.

Here's a graph that shows the growth in real consumer spending since the beginning of the Great Recession in December 2007:

Note that real consumer spending fell to $9.843 trillion in 2009 but has risen by 9 percent to its current level of $10.728 trillion, a new high.

What doesn't look as healthy is the growth rate of consumer spending.  Here is a graph that shows the compounded annual growth rate in consumer spending all the way back to 1929:

Including all recessions (and the Great Depression as well), over the 95 years in the data base, consumer spending rose by an compounded average rate of 2.81 percent.  Please keep in mind that this includes the four years between 1930 and 1933 when consumer spending shrank by between 2.2 percent and 9.0 percent annually.

Here is a detailed look at the annual growth rate of consumer spending since 2007:

2007 - 2.2 percent

2008 - minus 0.4 percent

2009 - minus 1.6 percent

2010 - 2.0 percent

2011 - 2.5 percent

2012 - 2.2 percent

2013 - 2.0 percent

Last year's growth rate of 2.0 percent was the lowest level of growth in consumer spending since 1982, excluding the recession in 1991 when consumer spending still rose by 0.2 percent in spite of the economic contraction.  From the graph, you can easily note that, when measured using the annual growth rate of real consumer spending, this is one of the most modest recoveries in the past century.

Just in case you thought that consumers were being more prudent and taking on less debt, here is a graphic showing the fourth quarter 2013 household debt figures from the Federal Reserve Bank of New York:

Non-housing debt in the fourth quarter of 2013 rose by 3.3 percent from the previous quarter with gains of $18 billion in auto loans and $11 billion in credit card debt.  On a year-over-year basis, auto loan debt rose by $80 billion to $863 billion and credit card debt rose by $4 billion to $683 billion.  It certainly appears that consumers are not particularly adverse to taking on additional debt and that the spectre of debt isn't keeping at least some consumers from spending.

While the headlines suggest that the American economy is on the mend, with so much of economic growth relying on consumers, the rather modest growth in consumer spending compared to historical inter-recessional periods would suggest that economic growth will continue to be less than stellar and may go a long way to explaining why this recovery hasn't really seemed like the recoveries that we all remember so fondly.

GDP Growth and Consumers' Perception of Well-Being

Updated January 31, 2014

While we keep reading mainstream media reports that the United States recovery is underway and that consumer confidence is at its highest level since before the Great Recession, as you will see, consumer sentiment is in the eye of the beholder.

Here is a chart from FRED showing consumer sentiment since the beginning of the Great Recession:

The current reading of 81.2 which is not reflected in FRED's database is up significantly from its Great Recession nadir of 55.3 seen in November 2008.  That's just wonderful, isn't it?  All must be well even though the rate has dropped from 85.1 back in July 2013.

Before we draw any hasty conclusions, let's look at a graph that shows a more complete history of  consumer sentiment dating back to the mid-1970s:

Unfortunately, just prior to the plunge in confidence, the University of Michigan Consumer Sentiment reading hit 96.9 at the beginning of 2007, just before the wheels fell off America's economic bus.  In fact, for the entire period between November 2003 and March 2005, consumer confidence was above 90, peaking at 103.9 in January 2004.  Going back even further, during the halcyon days of the Clinton Administration in the last half of the 1990s, consumer confidence remained firmly stuck at a level in excess of 100 for the entire period between March 1997 and November 2000 save for one single month when it fell to 97.4.  Even during the dark days of late 2001 after the World Trade Centre attack, consumer confidence only fell to a low of 81.8 and was below 90 for only four short months between September and December 2001 and then snapped back up to above a reading of 90 until July 2002.

A lack of consumer confidence has led to rather anemic annual growth (i.e. no growth) in consumer loans compared to the recovery after the 2001 recession as shown here:

If consumers aren't willing to expand their borrowing, for the most part, their ability to spend and stimulate the economy is somewhat restricted.

To put this rather modest improvement in consumer confidence into perspective, here is a graph showing the percentage of GDP that consumer expenditures are responsible for:

With consumer spending comprising such a significant portion of GDP, until consumers feel an increased sense of economic well-being similar to what they felt a decade ago, it is unlikely that GDP growth will remain anything but modest.