The IBD/TIPP Economic Optimism Index, a leading measure of consumer confidence, declined 3.1 points, or 7.5%, from 41.2 in May to 38.1 in June. Confidence in June is 36% below its pre-pandemic level of 59.8, recorded in February 2020.
In September of last year, the index fell below 50.0, defined as the pessimistic zone, and has remained there for ten consecutive months.
53% of Americans think we are in a recession. The share of Americans who believe we are in a recession under President Biden crossed the 50% mark this month.
The IBD/TIPP Economic Optimism Index is the first monthly measure of consumer confidence. It accurately predicts monthly changes in sentiment reflected in other well-known surveys by The Conference Board and the University of Michigan. Consumer spending drives two-thirds of the economy. Optimistic consumers spend money on automobiles, home improvements, new homes, and other large-ticket items.
The TIPP Economic Optimism Index is the most well-known of our TIPP indexes. Investor's Business Daily publishes the IBD/TIPP Economic Optimism Index every month.
Multiple factors are behind the country’s dark mood, reflected in our index and its components.
- Paying bills and making ends meet are big concerns for Americans. Inflation is an added tax, and each household spends an additional $460 monthly.
- The stock market correction and volatility are adding to the gloom. This year, the stock market has lost over $7 trillion.
- Geopolitical turmoil has offset the positive gains from the pandemic recovery. The Russia-Ukraine conflict, the impact of sanctions, and gasoline prices exacerbate inflation.
- Fears of an economic recession are running high. Americans are staring at the possibility of protracted stagflation.
- Due to decades of globalization and reliance on China, the American and Chinese economies have strong ties. Beijing is going back to lockdowns again. Driven by its zero-Covid policies, Chinese manufacturing is slowing down, which will likely cause further supply chain hiccups.
- There is general anxiety if the Fed can tame inflation accompanied by skepticism about Biden’s policies. Only a quarter (25%) give President Biden good grades for handling the economy. Surprisingly, only 45% of Democrats give him good grades. 84% of Republicans and 58% of independents give Biden failing grades.
In summary, Americans’ economic outlook is dark.
IBD/TIPP Economic Optimism Index
The flagship index has three equally weighted components. For the index and its components, a reading above 50.0 signals optimism, and a reading below 50.0 indicates pessimism. All three index components fell in June.
The Six-Month Economic Outlook, a measure of consumers' feelings about the economy's prospects in the next six months, declined 2.6 points, or 7.8%, to 30.6, in June. This is the component's lowest reading since August 2011 (31.7). The component has fallen 46% since February 2020, the most among the three components of the optimism index. The component has shown the highest variability during the pandemic, with a standard deviation of 7.0.
The Personal Financial Outlook, a measure of how Americans feel about their personal finances in the next six months, dropped 4.0 points, or 7.9%, to 46.4 this month. In March, it slipped into the pessimism territory, below 50, after staying in the optimism zone for 20 consecutive months. But, in April, it posted 52.2 and rebounded quickly into the positive zone. It fell back again into the pessimism zone in June. This component has fallen 28% since February 2020. It has the lowest variability with a standard deviation of 3.7.
Confidence in Federal Economic Policies, a proprietary IBD/TIPP measure of how government economic policies are working, according to Americans, declined2.7 points, or 6.7%, to 37.4 in June. The component's previous low of 36.2 was in September 2015. Confidence in Federal Economic Policies has fallen 35% since February 2020. The standard deviation for this component is 5.4.
In general, people who belong to the president's party are more optimistic about the economy than people who belong to the opposition.
Democrats have the highest confidence level at 52.7, followed by independents at 32.6 and Republicans at 24.4.
Democrats have stayed in the positive zone for all 19 months since December 2020, the month after Biden won the election. Their confidence rose from 32.9 in September 2020 to 73.8 in April 2021. However, it has dropped gradually to 52.7, down 21.1 points or 29% over the last fifteen months.
Republicans have stayed in the pessimistic territory for 19 months after Biden was elected. Republicans' confidence is down 56.5 points, or 70% lower than its pre-pandemic reading in February 2020.
Independents' confidence declined 0.2 points to 32.6, which is 27.3 points, or 46% lower than its pre-pandemic reading in February 2020. Independents have stayed in pessimistic territory for 27 consecutive months since April 2020, which does not help the incumbents in the midterm elections slated for November 2022.
IBD/TIPP considers survey respondents to be "investors" if they currently have at least $10,000 invested in the stock market, either personally or jointly with a spouse, either directly or through a retirement plan. We classified 32% of survey respondents who met this criterion as investors and the remaining 63% as non-investors. We could not ascertain the status of 5% of respondents.
In June, investors declined from 47.4 to 46.9,0.5 points or 1.1%, and non-investors dropped sharply from 38.0 to 34.1, 3.9 points, or 10.3%.
The economic optimism gap between investors and non-investors is 12.8points in June, widening from 6.1 in January. In August 2021, the economic optimism gap between investors and non-investors was 17.3 points, a record high in the 21-year history of the IBD/TIPP Economic Optimism Index.
IBD's market direction indicator shows the stock market is under correction. As of Thursday's close, the S&P 500 has pulled back 1,129.79 points, or 23.6% year-to-date, and the Dow has dropped 6,657.99 points, or 18.2%. The tech-heavy Nasdaq index has slumped 5,186.70 or 32.8% year-to-date. The stock market is in the bear-market territory, defined as 20% off its peak.
Tech stocks have taken a beating, with Facebook (Meta) down 52.5% YTD, Amazon down 39.2%, Netflix down 71.0%, and Google (Alphabet) down 26.5%.
Comparing a measure's short-term average to its long-term average is one way to detect its underlying momentum. For example, the indicator is bullish if the 3-month average is higher than the 6-month average. The same holds if the 6-month average exceeds the 12-month average.
In June, all index readings were lower than their three-month moving averages, signaling a slowdown.
Furthermore, the three-month moving averages are lower than their six-month moving averages in all cases. And the six-month moving averages are lower than their 12-month counterparts.
As a result, the data presents a convincing picture of weakening economic confidence.
Ninety percent of our survey respondents are worried about inflation.
Concerns were greatest among individuals aged 65 and older and households in the $75K+ bracket.
- 82% among those aged 18 to 24 (up from 74% in May)
- 86% for those aged 25 to 44 (no change since May)
- 94% for age 45 to 64 (up from 91%)
- 96% for age 65+(no change since May)
By household income
- 85% for households under $30K income (no change since May)
- 91% for the $30K to $50K households (down from 93%)
- 91% for the $50K to $75K bracket (up from 90%)
- 95% for $75K+ (up from 91%).
According to the Consumer Price Index (CPI), inflation rose 1.0 percent in May, rising 8.6 percent between May 2021 and May 2022.
Compared to a year ago, Americans are paying 107% more for fuel oil, 49% more for gasoline, and 30% for natural gas. Food prices have increased by 10.1%, while experts say it may be closer to double digits.
When President Biden took office, the CPI was 1.4%, well under the Fed’s goal of 2.0%. For the 17 months, he has been in office, except for the first two months, the CPI posted above the Fed goal.
The chart below shows the momentum. For all items, the reading for May (1.00) is more than its three-month average (0.83). The three-month average (0.83) is more than the six-month average (0.75). The six-month average (0.75) is more than the 12-month average (0.68).
Digging deeper, comparing the May reading to its three-month average, we can see that the food category increased, while the energy category moderated somewhat in May.
However, the core (all items less food and energy) posted an increase in May compared to its three-month average.
As employers compete for scarce labor, wages have risen. In the latest jobs report, average hourly earnings rose by 10 cents, or 0.3 percent, to $31.95. The year-on-year increase was 5.2%, significantly less than the inflation rate of 8.6% for the same period. The payrolls are not keeping up with inflation.
Most respondents (55%) say their wages have not kept pace with inflation. Only one in six (18%) say that it has.
As a result of inflation, Americans are cutting back on household spending.
Almost three-quarters (73%) of respondents said they cut back on household spending. Cutting expenses was seen among people of all ages and income levels.
Among those cutting back, most are cutting spending on entertainment (90%), eating out (89%), holiday/vacation travel (89%), purchases of big-ticket items (88%), and canceling memberships/subscriptions (80%).
The high gasoline prices are forcing 79% to cut back on local driving. Many (76%) are cutting back on even good causes such as charity giving. Over two-thirds (67%) of households are cutting grocery expenses.
As consumers pull back their spending, it could trigger an overall economic slowdown.
The Federal Reserve believes that long-run inflation of 2%, measured by the annual change in the price index for personal consumption expenditures, is most consistent with its maximum employment and price stability mandate.
On Thursday, the Fed increased its benchmark interest rate by 0.75 percentage points to 1.5%, the biggest increase since 1994.
The Fed has a long way to go to tame inflation. The terminal rate will have to match the inflation rate to get inflation under control. The “dot plot” of individual members’ expectations shows that the Fed’s benchmark rate will end the year at 3.4%.
The Fed is also implementing quantitative tightening, the opposite of Quantitative Easing, to reduce its $9 trillion balance sheet.
In July 2021, the National Bureau of Economic Research's Business Cycle Dating Committee determined that the recession started in March 2020 and ended in April 2020. The recession lasted just two months, making it the shortest record in the United States. May 2020 was the first month of the expansion.
However, the economy has not yet returned to normalcy, as evidenced by our data. Over half (53%) believe we are in a recession, and 25% are unsure. 20% think we’re not in a recession. Those who say we are in a downturn climbed from 47% in April to 48% in May and 53% in June.
About one-fifth (20%) believe that the U.S. economy is improving, while most (67%) think it is not improving.
President Biden Policies
Americans lack confidence in President Biden’s ability to handle the economy. This is true even among Democrats, with only 45% giving him good grades. Republicans (85%) and Independents (57%) give failing grades. Prominent economists believe President Biden’s 1.9 trillion stimulus spending contributed at least two points to inflation. Recently President Biden’s economic team tried to convince Americans that the economy was in “transition,” only to see that inflation spiked the following month again. President Biden needs a new economic team; the earlier he gets one, the better for him and the country.
In summary, economic confidence is low. Geopolitical uncertainties persist, threatening global economic equilibrium. Inflation will continue for the foreseeable future and will be a key campaign issue in November 2022.
The risks of stagflation, or high inflation with a recession, are significant. The wage growth is not keeping pace with inflation. Persisting inflation is likely to weaken economic confidence further. The data signals a recession around the corner; how soon is the question.
TIPP polled 1,310 adults nationwide via an online survey from June 8 to June 10.
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