Confidence Improving, but Who’s Responsible?

On Monday morning, CBS News released the results of a poll that was conducted to study consumer attitudes toward retirement. Details of the poll were discussed in an article entitled “Americans Anxious About Their Retirement Savings“, which was posted on http://www.cbsnews.com. As expected, the results revealed a high degree of anxiety over the financial preparedness to eventually punch out for good. Also as expected, those consumers earning lower incomes are the most worried. “Among those Americans with lower incomes-those making under $50,000 a year-78 percent are finding it especially difficult to save for their retirement while at the same time keeping up with their bills.” The article goes on to say, “…two-thirds of Americans with incomes below $50,000 a year are not confident they are saving enough for retirement.”

Our concerns about 1) the widening income and wealth gaps; and 2) consumers’ ill-preparedness for retirement, are well documented. While the more well-to-do have benefited immensely from a resurgent stock market, those middle-class consumers more heavily dependent on their paychecks are showing much less improvement in their financial situations. Median household income is hovering around 1995 levels, and relatively high-paying and full-time jobs (with benefits) are still hard to come by. And although consumer confidence has been improving in recent years, the differences are stark between the confidence reported by higher-income folks ($50K+) and lower-income folks (less than $50K).

Below we show the trends in Consumer Confidence by income level as reported by the Conference Board. The chart can easily speak for itself, but I’ll add some additional color from Credit Suisse economist Michael Exstein, who wrote about the issue in a November 7 note to clients.

The spread in consumer confidence between households earning above $50,000 and the average confidence level of brackets below this income level has grown to 46 points – versus an average of 32 points prior to the Great Recession. The differential appears to be expanding as recovery accelerates for the upper-income consumer, while the low-end sees only modest improvements.”

226Source: Conference Board.

For us at Farr, Miller & Washington, these figures only reinforce our long-held belief that the majority of Americans are not benefiting much from this recovery. We believe economic growth will remain at sub-par levels until incomes, confidence and spending increase at higher rates among those in the middle class. It is the masses that can truly move the needed and get us to sustainable economic growth of greater than 3%. Unfortunately, these same masses need to pay down still-high debt levels while increasing their savings for retirement. The consumer savings rate has been trending up since the post-Great-Depression lows in 2005, preceding the financial crisis. According to the Bureau of Economic Analysis, consumers saved 5.5% of disposable income in the third quarter of 2014 compared to the low of 2.2% in the third quarter of 2005. We think savings rates will continue to move higher over time, thereby putting a ceiling on economic growth for a number of years.

225Source: Bureau of Economic Analysis

Take heed, the news is not all bad! The drop in gasoline prices to below $3 per gallon will serve as an effective tax break – and a very large one – for all those who drive. I’ve heard estimates that the average driver could save $500 or more each year if gas prices maintain their current levels. This could lead to a very Merry Christmas for many retailers. However, it should also be noted that lower gas prices are not as unambiguously positive as they had been in the past. The benefits of low gas prices could be partially offset by the negative effects of low oil prices on domestic energy companies. US energy companies have generated many new jobs over the past few years. If shale drilling projects start getting cancelled as a result of lower oil prices, it could create a further headwind to strong and more sustainable economic growth.

Peace,

Michael