Consumer Confidence Is Crumbling Despite Economic Expansion

Key takeaways

• The Consumer Confidence Index fell 4.5 points between May and June to its lowest point since February 2021 (98.7)
• Despite low consumer confidence, the economy continues to expand, with durable and non-defense capital goods orders rising month over month
• Currently, economists seem to say that we’re not due any recession (or a mild one, at most) – though the Confidence Index suggests that consumers feel otherwise
• Meanwhile, investors and analysts believe companies in the S&P 500 will see increased revenue and earnings in Q3/Q4 2022

Consumer confidence hit a new 16-month low in June, according to a new report from The Conference Board. Their Consumer Confidence Index, which tracks consumers’ assessments of current conditions and short-term outlooks, declined 4.5 points month over month.

Despite reports of increasing pessimism and recession fears from consumers, the economy continues to expand. And while some economists believe that the chance for a mild recession is on the rise, others believe a mild economic slowdown is more likely.

Here’s what that all means for investors.

The latest from the Consumer Confidence Index

The overall Consumer Confidence Index fell 4.5 points from May’s 103.2 to 98.7 in June. Currently, it sits at its lowest point since February 2021, suggesting that consumer attitudes are souring on the economy.

The Conference Board also publishes the Present Situation Index, which assesses how consumers feel about business and labor market conditions. This Index slipped marginally from 147.4 to 147.1 as the number of consumers saying:

• Business conditions are “Bad” rose from 21.7% to 23%
• Jobs are “Plentiful” slipped from 51.9% to 51.3%
• Jobs are “Hard to Get” fell from 12.4% to 11.6%

But it’s the Expectations Index that was hit hardest, plunging from 73.7 to 66.4 to land at its lowest level since March 2013.

The Expectations Index surveys consumers’ thoughts on six-month income, business and labor market outcomes. The Index’s sudden decline suggests that consumers are most pessimistic about future conditions, including their own financial prospects.

According to June’s poll, the number of consumers who believe business conditions will improve fell from 16.4% to 14.7%. Meanwhile, the number of consumers who think business conditions will worsen jumped from 26.4% to 29.5%.

The Index saw similar outcomes in labor and income expectations.

Currently, 16.3% believe more jobs will become available (down from 17.5%), while 22% expect fewer job vacancies (up from 17.9%).

Meanwhile, the number of consumers who believe their incomes will increase fell from 17.9% to 15.9%. 15.2% now believe their incomes will decrease, up from 14.5%.

Where low consumer confidence hits hardest

Lynn Franco, senior director of Economic Indicators at The Conference Board, sees low consumer confidence hitting large, discretionary purchases hardest.

In particular, “purchasing intentions” for cars, houses and appliances have fallen since early 2022 and will likely continue to decline. Consumer spending on discretionary expenses like vacations and travel are also falling to the wayside.

Already, 54% of would-be vacationers report altering their plans to minimize price tags, with changes impacting:

• Destination planning
• Airline travel
• Lodging choices
• Restaurant and food splurging budgets
• Gift and vacation shopping

Franco cites 40-year-high inflation and the Federal Reserve’s increasingly aggressive rate hikes as primary reasons for lowered spending. She also predicts that rate hikes and inflation will batter spending and economic growth for the remainder of the year.

Despite dwindling optimism, expansion marches on

Consumer sentiments continue to paint a drearier picture of the economy all the time. But a few key metrics suggest that the economy isn’t contracting – instead, it may be expanding.

For example, a government report shows that orders for durable goods rose 0.7% in May. (“Durable goods” refers to products that last 3+ years like cars, heavy machinery, appliances and electronics.) Shipments of manufactured durable goods also rose 1.3%., while new nondefense orders of capital goods increased 0.5%.

May’s stronger-than-expected readings suggest that manufacturers continue to see strong demand in the face of economic headwinds. And a late-June report from the Kansas City Fed indicates that while regional growth is slowing, demand continues to outpace supply in the face of ongoing supply chain snarls.

Though some consumers see a bleak future, many remain optimistic thanks to the strongest U.S. labor market in decades. So far, unemployment remains near pre-pandemic lows as companies continue to hire. And while some businesses – particularly in tech – are shedding employees, layoffs also remain at record lows.

As Amherst Pierpont Securities’ chief economist Stephen Stanley notes: “…Business investment remains strong, though it certainly would not be surprising to see some moderation going forward as borrowing rates and uncertainty regarding the economic outlook rise.”

So, why are consumers so pessimistic?

If the business outlook remains high, why is consumer confidence falling?

One likely reason is that while some numbers show economic expansion, high inflation and rising interest rates continue to pincer consumer incomes.

True, wages have largely grown in the last two years – but most haven’t matched the 8.6% annual inflation we’re seeing now. These effects are compounded by the fact that consumer necessities (notably food, gas, vehicle and rent prices) have surged astronomically.

At the same time, multiple successive rate hikes, courtesy of the Federal Reserve, have made borrowing more expensive. If the Fed’s aggressive path forward continues, some worry it could tip the economy into a recession.

And as for that increased manufacturing demand, the Dallas Federal Reserve cautions against counting our chickens too early.

While May’s numbers sit strong, an early June survey of Texas manufacturing executives suggests we’re on the cusp of a sharp slowdown triggered by weakening demand. Though persistent labor and supply shortages buoyed demand through spring, rising inflation and interest rates see many businesses cutting back this summer.

What do investors have to say?

Through all this consumer confidence and economic hubbub, investors have their own take. Current evidence suggests that investors remain overall optimistic about the economy, with many analysts predicting that S&P 500 company earnings will see continued growth through 2022.

Still, some warn that poor consumer confidence readings could become a self-fulfilling prophecy as spooked consumers pull back spending. If consumer activities decline enough, fears of recession could, ironically, be the catalyst that sparks a recession.

Many defensive stocks have already traded up in 2022 on these fears, with utilities and healthcare leading the way. Meanwhile, momentum stocks – especially tech giants – have taken enormous price hits.

Boost your confidence with Q.ai

The evidence for – and belief in – an imminent recession grows more mixed all the time. Some economic data shows the economy expanding, while consumers are increasingly pessimistic as 2021’s optimism fades away. Meanwhile, investors and analysts continue to hold out hope that companies have more growth potential yet.

In other words, it’s a confusing time to be an investor.

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