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Is the Rebound in Consumer Confidence Sustainable?

Scott Anderson
Chief Economist

Consumer confidence declined sharply in March and April as it became necessary for states across the country to issue stay-at-home orders in an effort to limit the spread of COVID-19.

The mandate shuttered all nonessential businesses, led to unprecedented job losses totaling close to 41 million claims through the third week in May and derailed confidence.

The nearly 47-point decline in consumer confidence from February to April was predominantly driven by the present situation index – a measure of consumers’ assessment of current business and labor market conditions – which fell nearly 100 points from February to April as consumer attitudes became more dour amid the hard stop in economic activity.

The future expectations index – based on consumers’ short-term outlook for income, business and labor market conditions – fell a more modest 11.2 points over the same period. Indeed, a pattern of sudden and sharp declines in the present situation index is in synch with the start of previous economic downturns.

Confidence stabilized in May – albeit at the lowest levels since June 2014. The present situation index fell another two points, but the future expectations index rose 2.6 points to 96.6 as consumers became increasingly optimistic about future economic growth as the stock market continued to rise and as more states reopened their economies. While a one-month stabilization is welcome, it does not guarantee a bottom in confidence is already in.

Could be an Important Q3 GDP Growth Signal

The difference between the consumer expectations and present situation index has turned positive two months prior to the end of each recession since 1980 on average with the one exception being the 1981 recession when the difference remained positive throughout the downturn. If that past relationship holds during this recession, economic growth will resume in the third quarter after the differential turned positive in April.

However, details underlying the headline numbers in the consumer confidence report suggest the stabilization in consumer confidence this month might be only tentative. The Achilles heel of a sustained rebound in consumer confidence is the deterioration in the labor market. The percentage of respondents who say jobs “are plentiful” minus the percentage who indicate jobs are “hard to get” is highly correlated with the unemployment rate.

Jobs plentiful exceeded jobs hard to get for nearly four years from July 2016 to March 2020. However, for the last two months survey respondents have reacted strongly to the increased slack in the labor market. If the unemployment rate remains elevated or rises further, consumer confidence is bound to sink to new lows.

Consumer income expectations continue to deteriorate too. The percentage of consumers who are expecting an increase in their income over the next six months was 22.7 in February, but has fallen the last three months and is down to just 14.0 in May – the lowest since December 2013. The realization of little to no aggregate income growth – 71.0% indicated they anticipate their income to be the same in six months in the May report – over the next six months could cause consumer confidence to retreat further over the near term, diminishing any consumer spending rebound.

Consumer Confidence Outlook

Our outlook is for consumer confidence to be volatile over the near term due to the uncertain path to recovery and the potential for a second wave of the virus in the fall. A significant stock market decline would be another devastating setback for consumers. Moreover, any rebound in confidence is likely to prove fleeting until the labor market sees material improvement.

To find out more check out this week’s U.S. Outlook Report.


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