In a troubling sign for the American economy, consumer confidence has plummeted to its lowest point in over 11 years, with the Conference Board reporting a sharp decline in January. The drop is attributed to widespread anxiety over a sluggish job market and rising living costs, prompting consumers to adopt a more cautious approach to spending. This downturn may intensify pressure on the Biden administration to address what many economists and critics describe as an affordability crisis.
Sharp Decline Across Demographics
The consumer confidence index fell by 9.7 points to 84.5, marking the most significant decline since May 2014. This figure was notably below the 90.9 anticipated by economists surveyed by Reuters. Among various demographic groups, Independents expressed the most pessimism regarding the economy, with views on job availability deteriorating to their weakest levels in nearly five years. The survey, conducted before the recent capture of Venezuelan President Nicolás Maduro by U.S. forces, reflects a broader sense of unease that spans political affiliations.
Oliver Allen, a senior U.S. economist at Pantheon Macroeconomics, noted that while the expectations index has often overstated spending weaknesses in recent months, the latest downturn could signify a genuine shift, given stagnation in real incomes and an already low personal saving rate.
Employment Views Deteriorate
Consumer perceptions of job availability have worsened significantly, with only 23.9% of respondents viewing jobs as “plentiful,” down from 27.5% the previous month. Conversely, those perceiving jobs as “hard to get” rose to 20.8%, the highest rate since February 2021. The labour market differential—a key metric derived from respondents’ views on job availability—dropped to 3.1, also a new low since early 2021. This trend raises concerns about the potential for a rise in the unemployment rate, currently at 4.4%.
Tim Quinlan, a senior economist at Wells Fargo, indicated that while the shift in consumer sentiment might not immediately halt spending, it does lead to more cautious behaviour, particularly among lower-income households. The perception of fewer available jobs is causing many consumers to reconsider major purchases, including homes and vacations.
Economic Implications of Consumer Hesitancy
The broader economic implications of declining consumer confidence are significant. With fewer consumers planning to invest in big-ticket items in the coming months, the potential for an economic slowdown looms larger. Recent executive measures taken by the Biden administration, aimed at improving housing affordability, such as restricting institutional investors from acquiring single-family homes, may not yield immediate results. Economists argue that increasing the supply of affordable housing is crucial to addressing the crisis effectively.
High material costs, exacerbated by tariffs on essential goods like lumber, alongside a labour shortage worsened by immigration restrictions, are further constraining the housing market. A report from the Federal Housing Finance Agency revealed that single-family house prices rose 0.6% month-on-month in November, reflecting ongoing pressures despite a slight decline in mortgage rates.
Why it Matters
The significant drop in consumer confidence is a critical indicator of potential economic turbulence ahead. As households grapple with rising prices and stagnant wages, their cautious approach to spending could lead to a slowdown in economic growth. This situation necessitates immediate attention from policymakers to foster stability and confidence in the market, ensuring that the recovery from the pandemic remains on track.
