U.S. Households Still Sour on the Economy—That's Bullish

A handful of surveys released over the past few weeks reveal a common theme: American households remain skeptical about the overall health of the economy.

One such survey was released last week by the credit-reporting firm TransUnion, which showed that Americans are more concerned about inflation and interest rates today than they have been in over two years. About 50% of TransUnion’s survey respondents said that high interest rates were among their top three financial concerns, with 84% saying that higher prices for gas, groceries, and other everyday goods were impacting household budgets negatively.(1)

We know from the consumer price index (CPI) and personal consumption expenditures (PCE) that inflation peaked in June 2022 and has been steadily improving since. But consumers don’t see it that way. Many households do not differentiate between price and inflation, which means that many continue to see inflation as a problem that keeps getting worse—not better.(2)

Another survey conducted by business intelligence company Morning Consult supports this point. They found that less than half of Americans identified inflation as the rate of change of rising prices for goods and services. Instead, inflation just means ‘higher prices,’ which is why 69% of respondents to Morning Consult’s survey said that inflation was higher today than it was a year ago. We know from the data that this is not factually correct.

Misunderstanding inflation is a key reason why investor and consumer sentiment remain relatively low. Nearly half of Americans think that inflation is outpacing income growth, which as seen in the chart below, has not been the case (in aggregate across the economy) in recent months:

Median Year-over-Year (%) Wage Growth (blue line) has Outpaced Inflation Since 2023

All told, only about a quarter of Americans define inflation as the rise in prices over the past year. Most households experience inflation as presented in the chart below—they see the blue line, which shows consumer prices moving ever higher on a nominal basis, even though the rate of change has been improving. The chart below looks at the same data—consumer price index for all items in the U.S.—in different terms. The blue line shows prices indexed to levels from 40 years ago, while the red line shows the year-over-year percentage change. Economists and the Federal Reserve focus on the red line when making projections and setting policy. Consumers tend to experience the blue line.

Consumer Price Index (CPI) for All Items in the U.S.

Then there’s consumer sentiment as measured by the University of Michigan’s popular index. In a preliminary estimate from early June, the University of Michigan’s consumer sentiment index fell to 65.6 from May’s 69.1 reading, which was well below economist expectations for sentiment to improve to 72.0. A separate gauge of consumer sentiment surrounding personal finance also fell to its lowest level since October 2023, and consumers also expressed concern about broad economic conditions. These concerns seem to be growing alongside the growing economy.

In my view, the picture that emerges of concerned, largely skeptical U.S. households is bullish for equity markets. It highlights a disconnect between economic fundamentals and sentiment about the economy, which over time I’ve tended to identify as part of the ‘wall of worry’ that stocks like to climb.

A case-in-point comes from the TransUnion survey. U.S. households expressed high levels of concern about interest rates and inflation, but they also reported optimism about personal finances given the stable jobs market and wage increases over the past year. It is almost as if to say, “the economy is in trouble, but our personal situation has been improving.”

The reality—as evidenced by the economic data we track closely—is that the economy and household balance sheets are both getting better at the same time, which is also why I think the stock market has been rallying this year.

Bottom Line for Investors

John Templeton famously said that “bull markets are born on pessimism,?grow on skepticism, mature on optimism and die on euphoria.” Measures of consumer and investor sentiment, as detailed above, indicate that there’s still plenty of skepticism about the economy and markets—even as fundamentals tell a different story. This disconnect, which is also an indication that the U.S. economy and corporate profitability are being underappreciated, keeps me optimistic about this bull market having more room to run.

1 FA Mag. June 12, 2024. https://www.fa-mag.com/news/americans--worries-about-interest-rates-and-inflation-have-hit-new-highs-78437.html

2 Yahoo Finance. June 14, 2024. https://finance.yahoo.com/news/us-consumer-sentiment-unexpectedly-falls-141504234.html

3 Fred Economic Data. April 10, 2024. https://fred.stlouisfed.org/series/FRBATLWGTUMHWGO#

4 Fred Economic Data. June 12, 2024. https://fred.stlouisfed.org/series/CPIAUCSL#

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