Understanding Consumer Sentiment: A Deep Dive into Economic Perceptions
Consumer sentiment has been a topic of much discussion since 2021. Despite various economic indicators showing signs of improvement, consumer confidence remains low. This paradox has puzzled economists and financial experts alike. In this blog, we will explore the reasons behind this persistent pessimism and highlight some optimistic trends that suggest the economy might not be as bad as it seems.
Reasons for Pessimism
Several factors contribute to the ongoing pessimism among consumers. Here are three primary drivers:
Inflation’s Lingering Shadow
Inflation has been a significant concern for many consumers. More than half of the population has no first-hand experience with persistent inflation, which was last a major issue over 30 years ago. Although recent data shows that inflation has cooled to 3% as of June 2023, it will take more than one month of data to convince many consumers that prices are returning to normal.
Low Savings Yields
Another factor contributing to consumer pessimism is the low yields on savings accounts. Even the best rates offered by banks barely exceed 4% APY in 2023, compared to rates of 6% and higher during similar inflation periods in the past. This makes it difficult for consumers to counterbalance their declining purchasing power with interest from savings.
Constant Rate Hikes
The Federal Reserve’s persistent rate hikes to tame inflation have also dampened consumer sentiment. The 5 percentage points added to credit card balance APRs have made borrowing more expensive, affecting consumer spending. Recent data from Bank of America indicates that older consumers are the only generation spending as much or more as they did in 2022.
Shots of Optimism
Despite the prevailing pessimism, there are several indicators that suggest consumers and households are doing better than many think. Here are four reasons for optimism:
Low Unemployment Rates
The national unemployment rate in May 2023 was 3.7%, a level not seen since the late 1960s. This near-full employment is a positive sign for the economy, indicating that most people who want jobs can find them.
Increasing Wages
Wages are also on the rise, particularly in the service sector, which has historically been lower-paying than manufacturing and office jobs. This increase in wages is helping to improve the financial situation for many households.
More Money in Checking Accounts
Both high- and lower-income Americans have more cash in their checking accounts than they did before the pandemic. Data from Bank of America and JPMorgan Chase supports this trend, indicating that people are better positioned financially than in previous years.
Willingness to Take Investment Risks
The percentage of Americans who own stock reached 61% in 2023, the highest since the 2008 recession. This willingness to invest suggests that consumers are more confident in the long-term prospects of the economy.
Consumer Credit Improvement
Another positive trend is the improvement in consumer credit. The average FICO® Score increased by four points from 2019 to 2022, allowing consumers to access loans and funds at better rates. This is crucial in an economy still feeling the effects of inflation.
Perception vs. Reality
The Federal Reserve’s annual Survey of Household Economics and Decisionmaking provides insights into how Americans are managing their daily finances. Interestingly, many heads of households report that they are doing “at least OK financially,” a sentiment that has remained consistent since the pandemic and is better than 10 years ago.
However, this positive self-assessment doesn’t align with the overall gloomy outlook many consumers have. This discrepancy suggests that while individuals may feel confident about their personal finances, they perceive broader economic conditions as negative.
Conclusion
Understanding consumer sentiment is complex, influenced by various factors ranging from inflation to employment rates. While there are valid reasons for pessimism, several indicators suggest that the economy is not in as bad a shape as many believe. At O1ne Mortgage, we understand the importance of financial stability and are here to help you navigate these uncertain times. For any mortgage service needs, feel free to call us at 213-732-3074. Our team of experts is ready to assist you in making informed financial decisions.
By staying informed and understanding the broader economic landscape, you can make better financial choices for yourself and your family. Remember, while the headlines may paint a grim picture, the underlying data often tells a more nuanced story.
