US Economy Struggles: Consumer Sentiment Hits Record Low

Economic Worries Grow as U.S. Consumer Sentiment Hits Eight-Month Low

In July, the University of Michigan's Consumer Sentiment Index revealed that consumer sentiment experienced a significant decline, reaching an eight-month low. Despite the lack of an official recession declaration, a survey by Affirm indicates that approximately 60% of Americans perceive the U.S. to be in a recession. Additionally, a Gallup poll found that a third of Americans identified economic issues as the country's most prominent problem.

Joanne W. Hsu, a representative from the University of Michigan, highlighted that despite positive economic indicators, many individuals do not feel financially secure. This sentiment could be attributed to the substantial inflation experienced during the Biden administration, peaking at 9.1% in June 2022. Although inflation has been on a downward trend, it continues to impact consumers' purchasing power.

Interestingly, although wages have been increasing at a faster rate under the Biden administration compared to the Trump era, the Heritage Foundation discovered that the average weekly paycheck, adjusted for inflation, has decreased by approximately 4.4% during Biden's tenure. Mark Hamrick from Bankrate explained that this reduction in purchasing power has rendered previously affordable necessities seemingly unattainable for numerous individuals, contributing to a sensation akin to a recession.

Additionally, other experts suggest that this disconnect between macroeconomic performance and consumer sentiment may stem from the continued impact of inflation on real incomes. While wages have increased, they have not kept pace with inflation, leading to a decrease in purchasing power. This situation has led to a broader perception among consumers that the economy is in a recession, even without an official declaration. As inflation remains a key concern, consumer behavior is expected to remain cautious, with spending likely to be restrained, particularly on non-essential goods

Key Takeaways

• Consumer sentiment in the U.S. hit an eight-month low in July 2024.
• Approximately 60% of Americans believe the U.S. is in a recession, despite official data suggesting otherwise.
• Inflation reached a 40-year high during the Biden administration.
• Average weekly paychecks shrank by 4.4% in real terms throughout Biden's presidency.
• Economic issues are considered the nation's most important problem by one-third of Americans.

Analysis

The decline in consumer sentiment mirrors broader economic anxieties, magnified by persistent inflation and diminishing real wages. This environment has repercussions on consumer-driven sectors and financial markets, potentially decelerating economic growth. From a political standpoint, it exerts pressure on the Biden administration and has the potential to influence the outcome of the 2024 election. Economically, if this pessimism is sustained, it could lead to reduced consumer spending and investment, further impeding recovery. In the long term, addressing structural economic issues and reinstating consumer confidence are critical for sustained growth.

Did You Know?

• Consumer Sentiment Index: The Consumer Sentiment Index is a monthly survey conducted by the University of Michigan, gauging consumers' overall economic expectations. It is based on their perspectives regarding personal finances, business conditions, and purchasing conditions. A lower index value indicates consumer pessimism about the economy, which can impact spending habits and overall economic growth.
• Inflation Adjusted Wages: Inflation-adjusted wages, also referred to as real wages, are computed by subtracting the inflation rate from the nominal wage increase. This metric demonstrates the actual increase in purchasing power of wages. If inflation surpasses wage growth, real wages decline, implying that workers can purchase less with their earnings despite a nominal pay raise.
• Heritage Foundation: The Heritage Foundation is a conservative think tank situated in Washington, D.C., focusing on public policy research and advocacy. It offers analysis and recommendations on diverse issues, including economic policy, national security, and social matters. The organization is renowned for its influence on Republican Party policies and its staunch support for free-market principles.