The IBD/TIPP Economic Optimism Index, a leading measure of consumer confidence, declined 4.3 points, or 9.5%, from 45.5 in April to 41.2 in May. In September of last year, the index fell below 50.0, defined as the pessimistic zone, and has remained there for nine consecutive months. Learn more here.
What is particularly interesting about this chart is that today, Americans’ personal financial situation is not that bad, though the trend is definitely down. It is the six-month outlook that is most troubling. They see the storm clouds building. This perception will cause purchasing decisions to turn negative and then becomes a self-fulfilling phenomenon. Politically, it also spells trouble for the Democrats in the 2022 midterm elections.
This is further exacerbated by the outlook on wages keeping up with inflation. As employers compete for scarce labor, wages have risen. In the latest jobs report, average hourly earnings rose by 10 cents, or 0.3 percent, to $31.85. The year-on-year increase was 5.5%. Most respondents (51%) say their wages have not kept pace with inflation. Only one in six (18%) say that it has.
This assumes that with the negative outlook for the future, businesses will cut back, and not only will Americans’ wages not keep up with inflation, but maybe they will need to start worrying about whether they even have a job.
Per Newton’s third law, for every action, there is an equal and opposite reaction. It applies even to economics. As a result of inflation, Americans are cutting back on household spending. Almost three-quarters (72%) of respondents said they cut back on household spending. Interestingly enough, cutting expenses was seen among people of all ages and income levels.
Among those cutting back, most cuts are happening in entertainment (91%), eating out (89%), holiday/vacation travel (89%), and memberships/subscription cancellations (83%).
The high gasoline prices are forcing 73% to cut back on local driving. Many (72%) are cutting back on even good causes such as charity giving. Over two-thirds (67%) of households are watching grocery expenses.
So the “nice to have” things of life will have to go. This is typically the first thing that goes when times get tough. If you are working in one of these types of jobs, you may want to start activating your “plan B.”
Alternatively, you will need to start looking at new ways to entertain yourself – that will still allow you to engage with the outside world and not online in your basement.
In general, people who belong to the president’s party are more optimistic about the economy than people who belong to the opposition. Democrats have the highest confidence level at 62.2, followed by independents at 32.8 and Republicans at 24.0.
Democrats have stayed in the positive zone for all 18 months since December 2020, the month after Biden won the election. Their confidence rose from 32.9 in September 2020 to 73.8 in April 2021. However, it has dropped gradually to 62.2, down 11.6 points or 16% over the last thirteen months.
Politically for the moment, the Democrats are not being that hurt yet by the current inflation shock. However, in the key demographic of Independents, it is becoming a real issue. The “jaw-boning” by these politicians has convinced their electorate that all is well. But Democrats know that talk eventually gets cheap, and they will need to have real solutions … or diversions. These diversions are what can be dangerous as a whole to all of us. More war, another pandemic panic to cover up the reality? Calling Trump and Trumpians racist won’t be enough.
In summary, economic confidence is low. Bad economic policies double down, and geopolitical uncertainties persist, threatening global economic equilibrium. Inflation will persist for the foreseeable future, and it will be a key campaign issue in November 2022.
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