Confident?

Do you remember that TV game show “Who Wants to be a Millionaire?”  You know, the one that gave contestants a chance to win big money for answering a series of multiple choice questions.  Regis Philbin was the host, and he used to badger the contestants by asking them if they were confident before accepting their answers.  To this day, I can’t hear the word confident without Regis’ voice popping into my head, asking me if I’m confident.

What about you?  Are you confident about your current economic situation?  Are you earning enough money to live the lifestyle you desire?  How about your outlook for the future?  Do you think the conditions are in place for the economy, and you personally, to thrive going forward?

Based on a survey produced by The Conference Board, which is a non-profit research organization, people are feeling extremely confident these days.  At its most recent reading of 120.3 for April, 2017, the Conference Board’s Consumer Confidence Index (CCI) currently stands at very close to a 16-year high.  The surge in confidence has been especially pronounced over the past year – a time frame during which the political backdrop has changed massively.  Therefore, judging by this survey anyway, it would stand to reason that most folks agree with President Trump’s economic policies.  And the consumer remains unfazed even with political infighting, controversies and legal investigations filling the headlines.  Is the optimism justified?

Source: Confidence Board

We may find clues if we dig a little deeper into the Consumer Confidence numbers.  In the chart below, we show consumer confidence by income level (and using 3-month rolling averages to reduce monthly volatility).   While confidence has improved significantly for each income level since the election, it remains highest (by a large margin) for those with the highest incomes and lowest for those with the lowest incomes.  We think this reflects both economic inequality (which has grown far more pronounced since the Great Recession ended), as well as the new administration’s advocacy for pro-business policies like lower taxes and less onerous regulation.  Lower-income folks stand to benefit less, or at least less directly, from these policies.  Moreover, we learned yesterday that President Trump’s budget includes reductions in spending on social programs designed to help the poor and disabled (SNAP, or food stamps, Medicaid, and Social Security Disability Insurance, for example).

Source: Confidence Board

Are the reductions in social-program spending reflected in the Consumer Confidence data?   It doesn’t appear so.   Below we show Consumer Confidence by income, with the beginning data point (three-month average of Aug ’16-Oct ’16) indexed to 100 for each income level.  Using this methodology, we can show which income levels have posted the biggest percentage improvements in confidence since the election.  Perhaps surprisingly, some of the lower income groups have posted the largest increases in confidence.  This represents a reversal of a consistent trend since the Great Recession.  We think the reversal reflects President Trump’s populist rhetoric, which led to strong voter support from the working classes in the election.   It should be noted, though, that even though confidence in the $25K-$35K group rose at the fastest pace since the election, it is still well below the higher income groups.  Furthermore, will confidence among the low-income groups recede now that the new administration is proposing sharp cuts to social programs?

Source: Confidence Board

Confidence is good to see, but it can be fickle and fleeting.  We’d much rather see continued improvements in hard economic data, especially those relating to the health of the middle-class consumer, before we get more excited about an acceleration in economic growth.

In an economy driven almost 70% by the consumer, we pay close attention to the consumer’s financial health. There are two main considerations: the consumer’s ability to spend and willingness to spend. The US is near full employment, but the jobs being created are sub-standard, and the workforce isn’t growing much. Wage gains are occurring, but the rate of growth is modest.  Rising Consumer Confidence is just one indicator of the consumer’s willingness to spend.  In short, things aren’t all bad.  So far the recovery is intact, but the health of the consumer, especially the numerous middle class, is vital.