Inflation’s Hidden Impact: Are Consumers Losing Faith in the Economy?
One of the interesting side effects of the monetary and fiscal stimulus over the last four years has been the resurgence of inflation. I call it interesting because we’ve had significant stimulus injected into our economy since the 2008 Great Financial Crisis. Yet, inflation barely moved off its longer-term trend of around 2%. Because inflation roared back with vigor you now have an entire generation of people who have experienced an inflation spike for the first time in their lives. And, unsurprisingly, they don’t like it!
What Is the Economy Telling Us Today?
First, let’s start with how the economy is doing.
The chart above paints a picture suggesting the U.S. economy is growing at a relatively steady clip since the COVID dip of 2020. U.S. Gross Domestic Product (GDP) is a common measure used to describe the totality of all the goods and services produced by companies and the government in the United States. This chart shows the U.S. GDP in dollar-terms. We can see that despite the relative uncertainty we may have been facing during this period the economy has expanded pretty consistently since the pandemic. On average, over the last five years the economy grew 2.87% each quarter. Not too bad!
Let’s also look at wage growth during this time.
On average, wages have increased 19.15% since the middle of 2019. Anyone who owns a business knows it’s been difficult to maintain labor costs at a steady level given the demand for workers that occurred from 2021 to 2023. There’s still decent demand for workers given nonfarm payrolls have continued their positive trend, albeit at a slower pace, suggesting individuals who are seeking work should eventually find work.
If we’re looking at wage growth, we should look at inflation during this period as well.
Inflation, as measured by the Consumer Price Index, has increased by 22.52% since 2019. Yes, this is more than average wages have risen, but not that much more. Generally speaking, wages have kept pace with inflation pretty tightly going back to the Great Financial Crisis in 2008.
So why is it, despite wage growth that’s kept up with inflation, decent jobs growth, and an economy that’s been expanding, that consumers are still very skeptical of the economy?
The two lines above show U.S. Consumer Sentiment (purple) and Current Economic Conditions (orange). Both are consumer-based surveys conducted by the University of Michigan. We can clearly see that since 2020, we’ve seen a downward trend in consumer’s feelings about the economy.
There are many takeaways we can describe based on these charts. In an effort to stay apolitical, the clearest takeaway in my opinion is consumers simply don’t like inflation no matter the broader circumstances. When you get a nice pay raise at work and are forced to turn around and spend the extra money on groceries and other goods that have inflated in price, that feels worse than a smaller pay raise with stable prices.
Why Is Consumer Sentiment Important To Understand?
While this is one of the hottest political hot potatoes, inflation is clearly a topic that is weighing on the sentiment of consumers. We like to understand how the consumer feels because that feeling ultimately works its way into the broader markets. Even though the consumer is feeling worse than they did pre-COVID, we’re still seeking the stock market at all-time highs and the consumer continuing to spend. We believe this is likely to continue despite the depressed sentiment viewed through these surveys.
The elections on November 5, while important for many, many reasons, are unlikely to shift the trajectory of the markets longer-term as we’ve discussed in the past. It’s best to keep an eye on the data and focus on our long-term objectives while doing what we can to sift out the noise.
