Poor Consumer Confidence Is A Consequence Of The Wrong Policies

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Consumers are unhappy with the United States economy, and it makes sense. Consumers in the United States survive on soaring credit card debt, while inflation, the hidden tax, weakening labor, and real disposable income figures prove that the economy is far from strong.

The renewed slump in the University of Michigan consumer sentiment proves that the recent bounce was short-lived, and the index continues to be well below the 2019 level. Citizens are suffering the consequences of inflationist policies.

The latest reading indicates that consumer confidence fell to a six-month low of 67.4, while expectations dropped to the worst point in half a year. It was not only a decline in expectations but also a reduction in the current conditions index to a new low of 68.8.

I read a few broker reactions expressing surprise at these weak figures, given the alleged strength of the economy. In my view, this is what happens when analysts focus only on aggregate figures and headline numbers. We may miss reality.

Real wage growth has been stagnant for the past four years, despite the largest fiscal stimulus in decades. Unemployment may be low, but it has risen to twelve-month highs, while both the labor participation rate and the employment-to-population ratio remain below 2019 levels. Furthermore, full-time jobs have been flat since early 2023, while part-time jobs are the driver of employment figures.

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If we add a weak labor market to rising debt and delinquencies, we may understand what is really happening with U.S. consumers. Household debt rose to $17.5 trillion in the fourth quarter of 2023, according to the New York Federal Reserve Quarterly Report on Household Debt and Credit. Credit card balances increased by $50 billion to $1.13 trillion over the quarter and “delinquency transition rates increased for all debt types except for student loans.”.

As the University of Michigan website points out, “this 10-index-point decline is statistically significant and brings sentiment to its lowest reading in about six months. This month’s trend in sentiment is characterized by a broad consensus across consumers, with decreases across age, income, and education groups. Consumers in western states exhibited a particularly steep drop. While consumers have been reserving judgment for the past few months, they now perceive negative developments on a number of dimensions. They expressed worries that inflation, unemployment, and interest rates may all be moving in an unfavorable direction in the year ahead” (Surveys of Consumers Director Joanne Hsu).

Surprised with low consumer confidence¿ Not really. Americans are increasingly struggling to make ends meet, and the government is to blame.

Higher taxes have made the middle class suffer a significant reduction in real disposable income. According to the OECD, the total tax wedge on wages in the United States has risen from 28.3% in 2021 to 29.9% of total labor costs.

Higher inflation has made the recovery in the labor market fade away, with almost flat yearly real wage growth between 2021 and 2023.

Gross domestic income shows a poor 0.5% annual growth in 2023 compared to a headline-grabbing, robust GDP. Government spending and higher public debt have inflated GDP, giving a more optimistic view of the economy than citizens perceive.

Rising costs of living, higher taxes, and higher inflation are the reasons why Americans have a negative perception of an allegedly strong economy. Furthermore, this has occurred in a recovery, with record U.S. oil and gas production and the largest public stimulus plan in years. In summary, Keynesianism has failed again, and it leaves behind a trail of debt that will be difficult to curb.


More By This Author:

Governments Could Stop Inflation If They Wanted But They Will Not
Central Banks Are Wrong About Rate Cuts
Why The U.S. Public Debt Is Unsustainable And It Is Destroying The Middle Class

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