“The mind is everything. What you think you become.” – The Buddha
Americans are sending a mixed message about the economy. On one hand we tell pollsters we are pessimistic about the economy. However, our spending habits tell a different story. Afterall, it is our aggressive spending that has made the nation’s pandemic recovery the fastest in the developed world.
Consumer spending accounts for over 68 percent of GDP in the United States. That means our shopping is contributing to the economy by creating jobs, increasing profits and adding to tax revenues for state and local governments.
At the same time, however, savings are dwindling.
Pandemic Savings Boost
As the New York Fed reported last week, Americans’ savings and spending diverged during the pandemic.
Like other major economies, consumers in the U. S. cut spending and got government payments during the Corona shutdown. The result was an increase in savings.
Post Pandemic Spending Boost
The end of lockdowns and increased savings lead to a new economic term – revenge spending. Discretionary spending on travel, eating out, entertainment and related items exploded once pandemic restrictions were lifted.
Revenge spending occurred around the world. However, no one out did Americans.
“Among advanced economies, private consumption has been stronger in the United States than in the euro area,” The International Monetary Fund (IMF) reported last week, “with households receiving larger fiscal transfers early in the pandemic and spending the associated savings more quickly.”
Savings Trend Downward
The saving rate for all major economies increased dramatically during the pandemic, according to the Federal Reserve Bank of New York. In the U. S., savings rate about doubled from 2020 to 2021. However, since that time, the trend has reversed., but only in America.
“While saving rates have fallen across the board relative to 2020-21,” writes the NY Fed, “only in the United States has the rate dropped below its pre-pandemic average.”
The savings rate in the U. S. has fallen 2.5 percent below pre-pandemic levels. At the same time, consumers in other major economics are maintaining or increasing savings.
Why We Are Spending
The IMF thinks we are spending because we are, “better insulated from the rise in energy prices resulting from the war in Ukraine; and feeling relatively confident amid historically tight U.S. labor markets.”
Reports out today bolster the IMF’s view.
A U. S. Census Bureau report issued this morning shows that retail sales rose 0.7 percent last month. That pushed the third quarter figure to 8.4 percent. In addition, the Fed issued a report today showing that industrial production rose 0.3 percent in September.
Increased consumer spending and rising production are viewed by economists as a sign that people are optimistic about the economy. However, opinion polls do not reflect that sentiment.
Surveys Say . . .
A Gallup poll conducted in September, found that 48 percent of respondents rated economic conditions in America as poor. Only three percent said the economy was excellent while 17 percent said good and 32 percent responded fair.
A CNN poll the previous month yielded similar results. In that survey, 51 percent felt the economy was in a downturn and getting worse.
In addition, a Harris poll commissioned by The Guardian found that 68 percent of respondents were unhappy about the economy.
Economic Perceptions Versus Economic Actions
“People will generally accept facts as truth only if the facts agree with what they already believe.” – Andy Rooney
In reporting the results of their own polls, both CNN and The Guardian noted the disconnect between recent economic trends and respondents’ sentiments.
CNN reported that their poll results came “despite months of increasingly positive economic indicators.”
The Guardian determined that the takeaway from their poll was that, “Americans do not trust the government’s economic news – or the media’s reporting of it. . .”
One question in the Harris/Guardian poll illustrates the Guardian’s assertion. Here is what the publication reported:
“In August the unemployment rate was 3.8%, close to a 50-year low. But the poll found that 51% wrongly believe that unemployment is nearing a 50-year high rather than those who believe it’s actually low (49%).”
Inflation and Recession
Consumers’ perceptions may be tainted by inflation and the prospect of recession.
Coming out of the Covid recession, the Consumer Price Index (CPI) rose 6.8 percent from November 2020 to November 2021. It topped out at 9.1 percent in June last year.
Even though that inflation rate was the highest seen in four decades – that was then. Now, inflation stands at 3.6 percent.
Federal Reserve Chair Jerome Powell initially termed inflation “transitory”. Nevertheless, as supply chain snares drove up prices, the Fed instituted an aggressive series of rate hikes to combat the problem. In turn, that led to recession fears.
However, those fears are now receding.
In a rosy third quarter forecast, research and advisory firm Deloitte wrote:
“Despite all those possible reasons for gloom, the US economy is coming into fall with continued growth, lower inflation, and the possibility that all that talk about recession was, in the end, just that—talk.”
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