Economic Confidence Collapses As A Flood Of Negatives Predicts A Bad Patch

Economic Confidence Collapses As A Flood Of Negatives Predicts A Bad Patch

After an eight-month spell in the positive zone, economic confidence plummets in September.

Raghavan Mayur

The IBD/TIPP Economic Optimism Index, a leading measure of consumer confidence, declined 5.1 points or 9.5%, from 53.6 in August to 48.5 in September.

After eight consecutive months in the positive territory, the index entered the negative territory.

Confidence in September is 18.9% below its pre-pandemic level of 59.8 in February 2020.

The IBD/TIPP Economic Optimism Index is the first monthly measure of consumer confidence.  It accurately predicts monthly changes in sentiment in other well-known surveys conducted 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 collapse of the index and its components.

  • To begin, Americans suffered a psychological toll as a result of the botched Afghanistan withdrawal. It exacerbates fears of terrorism and fosters a gloomy mood that spills over into economic matters as well.
  • The trajectory of the virus is uncertain, and the end is elusive. For example, COVID cases in the United States have increased more than 300 percent since Labor Day last year.
  • Pandemic relief measures such as eviction moratoriums and augmented unemployment payments expire in September.
  • In August, the US economy added 235,000 jobs, a half-million less than expected by Wall Street. The slowdown in job creation is not encouraging.
  • The stock market is poised for a correction in the next sixty days as the Fed finetunes its monetary policy.
  • The real estate market is likely to cool due to increased supply and less demand. The expiration of mortgage forbearance will also impact the market.
  • Last but not least, macroeconomic factors like unemployment, wage growth, inflation, money supply, and new taxes weigh heavily in Americans' minds. They don't see the outlook as bright.

IBD/TIPP Economic Optimism Index

This flagship index has three equally weighted components. For the index and its components, a reading above 50.0 signals optimism, and below 50.0 indicates pessimism.

All three index components fell in September.

The Six-Month Economic Outlook, a measure of how consumers feel about the economy's prospects in the next six months, declined by 17.7%, dropping from 50.2 in August to 41.3 in September.  It is the component's 12-month low.

The Personal Financial Outlook, a measure of how Americans feel about their finances in the next six months, dropped 4.8%, from 57.8 in August to 55.0 this month.  It is also the index's 12-month low.

Confidence in Federal Economic Policies, a proprietary IBD/TIPP measure of views on how government economic policies are working, declined 7.2% from 52.9 in August to 49.1 in September.

IBD/TIPP Economic optimism index

Party Dynamics

Republicans' confidence fell to a pandemic low of 30.3, 50.6 points lower than in February 2020.

Democrats have the highest confidence level in August, at 68.1, followed by Independents at 41.0.

After climbing from 32.8 in September 2020 to 73.8 in April 2021, over the last five months, Democrats' confidence has dropped to 68.1.

IBD/TIPP Economic optimism index party dynamics

Investor Confidence

IBD/TIPP considers 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 35% of respondents who met this criterion as investors and the remaining 58% as non-investors. We could not ascertain the status of 7% of respondents.

In August, the economic optimism gap between investors and non-investors was 17.3 points, a record high in the 20-year history of the IBD/TIPP Economic Optimism Index.  The gap shrank to 15.7 in September.

The pandemic has divided the country into two camps: Haves and Have-nots

On the one hand, the "haves" are doing well, as evidenced by the stock market's performance.   The Dow Jones and S&P 500 indexes closed within 1% of new highs last week, while the Nasdaq composite set a new high.

On the other hand, the "have nots" have lost jobs and struggle to make ends meet, particularly in an inflationary environment.

IBD/TIPP Economic optimism index investor confidence

Momentum

Comparing a measure's short-term average to its long-term average is one way to detect its underlying momentum. For example, if the 3-month average is higher than the 6-month average, the indicator is bullish. The same holds if the 6-month average exceeds the 12-month average.

In September, all three index readings were lower than their three-month moving averages, indicating a slowdown.  Furthermore, the three-month moving average for the economic outlook, federal policies, and the economic optimism index is lower than the six-month moving average. The personal financial outlook is the only index whose three-month average is higher than the six-month average by 0.1 points.

As a result, the data presents a convincing picture of a slowdown.

IBD/TIPP Economic Optimism Index and components Momentum

Demographic Analysis

The number of groups in the positive zone indicates the breadth of optimism.

This month, eight of the 21 demographic groups we track — such as age, income, education, and race — are above 50.0, indicating a positive reading on the Economic Optimism Index.

Starting with eight groups in January 2021, we saw steady improvement, peaking at 18 groups in June, and then a steady decline to return to eight groups in September.

Only one of the 21 groups increased in confidence in September compared to eight in August.

IBD/TIPP Economic Optimism Index Number of confident groups
IBD/TIPP Economic Optimism Index Number of groups improving

Inflation

Last month, the Bureau of Labor Statistics reported that 12-month inflation, measured by the Consumer Price Index for All Urban Consumers (CPI-U), was 5.4 percent in July 2021 for the second straight month, a 20-year high.

12-month% Change in CPI for Urban Consumers - Inflation

In the IBD/TIPP Poll, 82% are worried about inflation.  Price increases in energy, food, and groceries can cause a perceptual shift, causing consumers to cut back on their spending.

IBD/TIPP Economic Optimism Index, Americans Inflation concerns

Instability in the Mideast will not help oil prices. Global food prices increased 31% year over year in July, owing to increased international prices of vegetable oils and sugar.  Also, the cost of shipping it from Shanghai to Los Angeles has increased from $3,392 to $11,362 -- a hike of 235 percent.

Some think that inflation is likely to peak. But others believe that it will persist in the foreseeable future.

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.

To boost liquidity, the Fed has been purchasing $120 billion in government-backed bonds each month -- $80 billion in Treasury debt and $40 billion in mortgage-backed securities. The inflation data will be one of the critical inputs in the Fed's decision to taper its asset purchases.  The Fed will meet on September 22 and 23.

Recession

In July, the National Bureau of Economic Research's Business Cycle Dating Committee determined that the recession started in March 2020 and ended in April 2020. May 2020 was the first month of the expansion.  The recession lasted just two months, making it the shortest on record in the United States.

However, the economy has not yet returned to normalcy, as evidenced by our data. 41% of Americans believe we are still in a recession and another 30% are unsure.

Those who believe that the economy is improving dropped precipitously from 42% in August to 32% in September.

IBD/Tipp Economic Optimism Index, Recession concerns for Americans
IBD/TIPP economic optimism Index, do Americans think the economy improving?

TechnoMetrica's View

The overall economic confidence is gloomy.  Much of it will depend on how the variants play out.  We are at a pivotal junction, and September will be a critical month for the economy.

The risks on the downside outweigh those on the upside. Watch the real estate market, the stock market, the job market, and the Fed meeting on September 21-22 for indications.  The real estate market is likely to cool down, and the stock market may undergo a correction over the next sixty days.

Inflation is here to stay for the foreseeable future.  Whether wage growth will keep pace with inflation remains to be seen. If inflation intensifies, it could dampen economic confidence further.  Instability in the Middle East could drive up energy prices.

The Fed may signal its intention to scale back its efforts to increase liquidity.

TIPP polled 1,305 adults nationwide from September 1 to September 3 via an online survey.


ICYMI

After Afghanistan Withdrawal, U.S Is Less Safe From Al-Qaeda
David Wilezol, the former Chief Speechwriter to the U.S. Secretary of State from 2017 to 2021, discusses the threat al-Qaeda poses to the U.S. after the Afghan withdrawal.
63% think The Biden Administration Bungled Afghan Withdrawal
The execution of the Afghan pullout was a mistake.
I&I/TIPP Poll: Biden Gets Most Of Blame For The Afghanistan.
Four out of ten people believe President Biden is to blame for the Afghan situation.

TIPP Takes

Official At Japan's LDP Urges Defense Cooperation

Okinawa

A Chinese strategy to forcefully take over Taiwan might include attacks on Japanese airbases from which Beijing could reach targets in Hualien more easily.

An official at Japan's governing Liberal Democratic Party (LDP) yesterday urged Taiwan, Japan, and the U.S. to establish a mechanism for defense cooperation, as China might increase pressure on Taipei from next year to 2027.

Satellite images showed that China had built a replica of Japan's Kadena Air Base in its Gansu Province, indicating that Beijing sees the base on Okinawa Island as a potential target.

If Beijing seeks to attack Taiwan, it might launch an attack on Okinawa first and use bases on the island to reach targets in Hualien County, which it might not reach as easily from across the Taiwan Strait.

Should Beijing deny commercial vessels access to the waters around Taiwan proper, he said it might cut Japan and South Korea off from fuel imports.  This would result in fuel shortages and soaring prices, severely affecting the Japanese economy.


Afghanistan Crisis | Russian Security Chief Discusses Joint Coordination With NSA Ajit Doval

Russia India flags

India raises Pakistan's links with the new regime, JeM, and LeT in the talks.

The two sides stressed on areas of 'convergence,' including the need to hold the Taliban to their promises thus far during the meeting that came a week after Russia decided to abstain from a U.N. Security Council Resolution on Afghanistan under India's presidency. The two sides stressed areas of 'convergence,' including the need to hold the Taliban to their promises thus far.

The Modi government has thus far maintained an independent posture from both the U.S. and Russian stands on the Taliban regime. The talks followed a day after CIA Director William Burns flew into Delhi to meet Mr. Doval.

The U.S. has been discussing housing its Afghan evacuees who are being processed in other countries, the emerging terror threat from developments in Afghanistan, and any future engagement with the Taliban government.


Proposals For An E.U. Army Re-Emerge After Afghan Pullout – But Many Remain 'Hard To Convince'

Proposals For An E.U. Army Re-Emerge After Afghan Pullout – But Many Remain 'Hard To Convince'

European dismay over President Joe Biden's precipitous withdrawal of U.S. troops from Afghanistan has renewed calls for an E.U. military force.

An E.U. "rapid response force" stretches back nearly a quarter of a century. Senior European politicians were saying in the late 1990s that the old continent's failure to prevent years of bloodletting on its doorstep in the Yugoslav Wars (until the U.S. got involved) highlighted the need for an armed E.U. force.

However, Divides between member states mean that any joint E.U. action could well rely on mission-specific "coalitions of the willing" outside of the bloc's organization structure.

As well as circumventing the need for unanimity or even majority support for military action, operating outside E.U. structures would allow a role for ex-member Britain, the continent's biggest defense spender and a global leader in intelligence capabilities.

The U.K.'s involvement would be essential to any plans for European strategic autonomy.


China Welcomes Taliban's Formation Of Afghanistan Interim Government

China Welcomes Taliban's Formation Of Afghanistan Interim Government

China on Wednesday welcomed the Taliban's formation of an interim government in Afghanistan, saying it is a necessary step for the nation to restore order at home.

Beijing has said that the Taliban, an Islamist group that returned to power last month after being ousted by U.S.-led forces in 2001, should set up a political structure that lays the foundation for lasting peace in Afghanistan.

Later in the day, Foreign Minister Wang Yi said China would provide Afghanistan with $31 million worth of food, daily necessities, and novel coronavirus vaccines, according to state-run media.

China has been cozying up to the Taliban, as the Asian power has been keen to prevent the group's political takeover in Afghanistan from encouraging separatist forces in China's mainly Muslim region of Xinjiang, which shares a border with the war-torn nation.

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