Doing Well, Feeling Bad

Consumer Sentiment Is Weak Despite a Strong U.S. Economy

Surveys indicate consumers feel almost as badly now as they did during the credit crisis in 2008 or when inflation hit double digits in the 1970s, yet the economy continues to perform well and household spending remains solid.  Does this presage an economic turndown?  Most likely, it shows the adverse effects of our contentious political environment.  Yet despite widespread unhappiness with political disagreements, consumers continue to spend, company profits are growing along with the economy, and that’s what really matters for the markets.

Arthur Okun, a well-known economist of the 20^th Century, developed the misery index, which was a simply construction that added the unemployment and inflation rates.  During the late 1970s/1980s, this measure exceeded 20%, reflecting both high unemployment and high inflation.  Not surprisingly, this combination did not sit well with consumers, who reported great dissatisfaction with the economy.  So, why are measures of consumer confidence now very weak, about as weak as during the dire periods of the 1970s and the 2008 credit crisis for the pandemic shutdown?  The Misery Index today is around 7.4%, with the unemployment rate at 4.4% and the CPI at 3.0%, far below 22% peak in 1980, around 10% during the credit crisis, and over 15% during the pandemic.  Economic conditions today are vastly better than in those trying periods, yet consumer surveys suggest that people are exceptionally dissatisfied.

Households Remain Cautious, While Corporate Growth and Employment Stay Strong

On the one hand, the data show that households are cautious.  As noted, surveys of consumer confidence are very low, as low as in the 1970s and 2008, while cash parked in money funds of around $7.5 trillion suggests households have moved considerable assets to the sidelines.  But on the other hand, corporate profits are very strong, while profit margins are near post-World War Two highs.  The unemployment rate remains historically very low and living standards are around all-time highs.  And household debt service is at the lowest level in decades.  So, why are people so gloomy?  What gives?

There is no doubt that political views are now highly polarized and the electorate is also highly divided on multiple issues.  Many families recently got together for Thanksgiving dinners, but plenty of families had to forbid political discussions or avoided such gatherings entirely to avoid rancor.  We likely all know family members who do not speak to one another.  The news media itself is highly polarized, with some networks reporting only liberal perspectives while others report only conservative viewpoints, yet both purport to be covering the news in the same country.  For one reason or another, demonstrations occur all the time and many are not peaceful.  So, why is the market flirting with new all-time record highs and the economy continues to roll along with no signs of recession?

Markets Reflect Economic Fundamentals More Than Consumer Mood

Markets reflect economic conditions, not political viewpoints.  The political scene may affect the markets, but only when it affects business conditions directly.  One recent example occurred when President Trump first announced tariffs, but those concerns faded as negotiations followed and it became clear the worst outcomes were unlikely to be realized.  If your car or washing machine or fridge need to be replaced, you may defer if you are truly nervous, but only for so long.  It is likely that much spending has already been deferred and further postponements are too inconvenient, so people are spending.  It is safe to guess that the gap between how people feel and how they are behaving is exceptionally wide.  The appropriate phrase is to watch what people do, not what they say. The above suggests that the investment environment remains quite positive.  We likely all know people who have pulled money out of the market and sit in frustration at the market gains they have missed.  Many of those people hope for a pullback so they can get back in, which limits any potential declines.

Advisors Capital Management, LLC is an investment advisor registered with the United States Securities and Exchange Commission. Registration does not imply any degree of skill or training. All investing carries risk, including the potential for the loss of principal and past performance is no guarantee of future results. This content is for informational purposes only, can change at any time without notice, and is not investment advice or a recommendation to trade any security. Indices are not available for direct investment. We only provide services in jurisdictions where we are registered. Our disclosure brochure (ADV Part 2A) and customer relationship summary (ADV Part 3) are available at https://adviserinfo.sec.gov and upon request.