If you listen to the politicians and the headlines, you'll hear a lot of talk about the "strong consumer" who is keeping the economy happily chugging along.
But when we hear from actual consumers themselves, we hear a very different story.
The majority of households are struggling under the surge in their cost of living post-COVID. Many express despair that the American dream is now beyond their reach.
For a detailed dive into this critical topic, we're fortunate today to speak with Joanne Hsu, director of the widely-followed University of Michigan's consumer sentiment survey.
The UMich data indeed shows that a growing majority are giving up hope they'll ever be able to afford the traditional middle class lifestyle of a car, home, and eventual retirement.
Here are my key takeaways from my interview with Joanne:
Current consumer sentiment is below average, despite strong labor market indicators and GDP growth. Sentiment was on an upward trajectory since mid-2022 but stalled in 2023 and declined by 10% in May and June 2024. Why? Because consumers report feeling weighed down by high prices and express uncertainty around their future financial prosperity.
Oddly, consumer surveys indicate positive views about the unemployment rate, job security, and future income growth, but consumers do not expect their income growth to outpace the rate of inflation. Even with expect wage growth, hey believe they are falling further behind the rising cost of living.
The survey reveals a significant bifurcation of wealth in society. Higher-income consumers are less affected by high prices and own assets that have rocketed higher in price over the past several years — so it’s little surprise this cohort has seen improvements in sentiment since mid-2022. In contrast, middle and lower-income groups continue to struggle, reporting that the high cost of living has significantly impacted their financial well-being. This wealth disparity has existed for a long time but was temporarily reduced during the pandemic due to wage gains among lower-income individuals, although high inflation has since eroded the benefits of these gains.
Consumers express concerns about
potential increases in unemployment and continued high inflation rates, which could further impact consumer confidence and spending. Middle and lower-income families' spending is precariously supported by today’s expectations of a continued strong labor market and income gains. If these weaken, consumer spending will likely drop significantly, slowing the economy and thus exacerbating the economic challenges for these groups.
To address wealth inequality, Joanne suggests two main policies, controlling the cost of higher education by increasing public funding and reducing student loan burdens, and resolving the childcare crisis to support working parents. These measures could significantly reduce the financial strain on middle and lower-income families and help alleviate economic disparities.
The University of Michigan Surveys of Consumers recently transitioned from phone interviews to web-based surveys. This change addresses the declining response rates to phone calls and maintains data accuracy. Extensive research since 2009, including parallel data collection by phone and web since 2017, confirmed that time series correlations remain high and data integrity is preserved. This transition allows for targeting specific populations, increasing sample sizes, and using visual aids.
Joanne emphasizes being ready for unexpected opportunities. She shares that her career path and current role opened up unexpectedly when Richard Curtin, the previous director, retired after 40 years. This illustrates the importance of preparedness and seizing opportunities as they arise, a lesson she learned from Federal Reserve Bank of Atlanta President Rafael Bostic.
For the full interview with Joanne Hsu, watch the video below:
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