Consumer Sentiment Drops to a Seven-Month Low
The University of Michigan's Consumer Sentiment Survey recently reported a significant drop, reaching its lowest point in seven months. The index reading for June was 65.6, a decrease from May's 69.1 and below the expected consensus of 72. Both the current conditions and expectations categories fell short of economists' predictions.
Unchanged Inflation Expectations
Inflation expectations for the upcoming year remained steady at 3.3% this month. However, this is higher than the 2.3–3.0% range observed in the two years before the pandemic, according to the press release. Long-term inflation expectations increased from 3.0% last month to 3.1% in June, significantly above the 2.2-2.6% range seen in the two years before the pandemic. This survey highlights the current weakness of the U.S. economy and the impact of persistent inflation on consumer sentiment.
President's Remarks on Inflation
President Joe Biden recently commented that there was zero monthly inflation in May, calling it a sign of progress. However, inflation was actually 3.3% in May, with services, shelter, and electricity costs increasing by 5.3%, 5.4%, and 5.9%, respectively. The claim of zero inflation in June does not align with the actual Consumer Price Index (CPI) reading for the month. These optimistic messages may be perceived by American consumers as exaggerated or even propagandistic.
Impact of Inflation Reduction Act
The Inflation Reduction Act has perpetuated inflation, as an unnecessarily aggressive fiscal policy undermined the Federal Reserve's decision to reduce the quantity of money in the system. The federal deficit is fueling inflation and keeping the CPI measure above the level where it should have been for at least twelve months.
Neo-Keynesians' View on Disinflation
Neo-Keynesians often cite the path of disinflation as a victory for the soft-landing approach. They argue that the economy did not enter a recession, unemployment is low, and prices are cooling off gradually. However, there is a counterargument to this optimistic view. The U.S. economy could have recovered faster, and consumers would not have experienced flat real wage growth, a loss of purchasing power, and crippling debt. The notion that government spending has bolstered the economy is unfounded. Excessive government intervention is a direct cause of the unsustainable deficit, rising taxes, ongoing inflation, and weaker productivity growth.
State of the U.S. Economy
Both the labor participation rate and employment-to-population ratios remain below pre-pandemic levels. Real wage growth has been almost flat for years. Inflation is a hidden tax, and it has worsened the recovery path of the United States. The deficit has fueled inflation. U.S. consumers have been accumulating debt to maintain consumption, and credit card debt has reached new record levels. This does not indicate a strong economy.
Impact of Keynesian Policies
The economy is weakening amidst a massive fiscal expansion, and debt continues to rise at an alarming rate while interest expenses reach new highs. Keynesian policies have weakened the private sector and small and medium-sized businesses. The discontent we are seeing in all developed countries is typical. Governments have focused on inflating headline macro figures, forgetting the average consumer and small businesses. Large corporations have been able to navigate these incorrect policies because of their financial muscle. However, families and small businesses are living a Keynesian nightmare. Employed yet impoverished, while businesses struggle to stay afloat. The imbalances in the public sector will generate less growth, higher taxes, and more challenges in the future. Public debt is not a tool for growth; it is a burden.
Consumer Confidence and Social Media
Some financial papers have suggested that the low consumer confidence reading may be due to negative analysis on social media. The St. Louis Fed reports that observers have cited disproportionately circulated negative economic news on social media as one possible reason for poor sentiment, disconnected from a robust economy. Another common view is that while inflation is cooling, the price level is still higher than it was a few years ago, and consumers have not yet adjusted. High prices are a factor, but they primarily work by eroding incomes, which has been found to have considerable influence on consumer sentiment.
Impact of Inflation and Higher Taxes
Blaming negative economic news makes no sense. The Consumer Sentiment Survey was at an all-time high in 2019, a period when there was general media negativity regarding the economy and the administration. Inflation and higher taxes are more likely reasons why consumers are depressed. Even the gross domestic income figure shows that things are not as solid as the government thinks. If we look at the discrepancy between GDP and GDI, or the difference between the unemployment rate and labor force participation, as well as real wages compared to nominal readings, we can understand why citizens are unhappy. Bloating GDP with debt always ends badly.
Final Thoughts
The current state of the U.S. economy is a complex issue, with many factors contributing to the current consumer sentiment. It's clear that inflation, government policies, and public debt play significant roles in shaping the economic landscape. What are your thoughts on this matter? Do you agree with the points made in this article? Share your thoughts and discuss with your friends. Don't forget to sign up for the Daily Briefing, delivered to your inbox every day at 6pm.
