Economic Confidence Slips in May, As President Biden's Tax Plan Squeezes The Wealthy

Economic Confidence Slips in May, As President Biden's Tax Plan Squeezes The Wealthy

The IBD/TIPP Economic Optimism Index slips in May. One reason for the decline is President Biden's tax increases and spending plans, which have eroded the confidence of high-income earners.

Raghavan Mayur
Raghavan Mayur

The IBD/TIPP Economic Optimism Index, a leading measure of consumer confidence, dropped slightly after increasing for four consecutive months.  The index posted a 3.5% decline slipping from the Pandemic high of 56.4 in April to 54.5 in May.

President Biden's tax increases and spending plans erode high-income earners' confidence, which fell a whopping 9.5 points or 14% from 67.8 in April to 58.3 in May.

Consumer spending drives two-thirds of the economy. Optimistic consumers spend money on automobiles, home improvements, new homes, and other large-ticket items.

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. Investor's Business Daily published the index on Tuesday and the original story is available here.

Even though President Biden's tax proposals erode high earners' confidence, various factors contribute to the index remaining in the positive territory.

  • Consumer perception has shifted significantly, and Americans are generally optimistic about putting the Pandemic behind them.
  • Most people are now more comfortable regularly working on-site at their places of employment.
  • Four in ten in our poll say that they are fully vaccinated, and another 18% have had the first shot.
  • Americans who qualify have received $1,400 as a result of the economic stimulus bill.

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.

In May, all three components of the index declined.

The Six-Month Economic Outlook, a measure of how consumers feel about the economy's prospects in the next six months, decreased by 4.8%, sliding from 55.9 in April to 53.2 in May.

The Personal Financial Outlook, a measure of how Americans feel about their finances in the next six months, fell by 0.5%, dropping from 57.3 in April to 57.0 this month.

Confidence in Federal Economic Policies, a proprietary IBD/TIPP measure of views on how government economic policies are working, lost 5.2% from 56.0 in April to 53.1 in May.

Party Dynamics

After climbing from 32.8 in September to 73.8 in April, Democrats' confidence pulled back a bit to 72.3.  Republicans did not post any change and stayed at 36.9. Independents also dropped a bit from 47.1 in April to 44.3 in May.

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.

Please see the chart below to see the optimism.  In all cases, the three-month moving average is greater than the six-month moving average.  And the six-month is greater than the twelve-month.

All three components and the index are a notch below their three-month moving averages, consistent with the overall patterns this month.

Demographic Analysis

This month, 17 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.  

We've seen a steady improvement over the last few months, with 17 groups in the positive zone in May, 17 groups in April, 16 groups in March, 11 in February, and eight in January.

The changes in confidence for income groups in May shows that the erosion among the wealthy drives the overall slide:

  • +2.6 points Under $30K (5.2%)
  • +0.9 points $30K-$50K (1.7%)
  • -0.8 points $50-$75K (-1.5%)
  • -9.5 points 75K+ (-14.0%)

For those with incomes above $75,000, optimism fell 9.5 points to 58.3, its biggest monthly drop since October 2013.

Investors also posted a large decline of 5.3 points.

President Biden briefed Congress on his $4.5 trillion infrastructure and social spending plans last week.  To finance the plan, he proposes increasing tax rates on corporate income, personal income for individuals earning more than $400,000, and capital gains for individuals earning more than $1 million.  The Biden tax increases and spending plans are sapping high-income earners' confidence.

Recession

There are other signs of improvement in the data.  In May, fewer Americans said that we are in a recession.  Those who think we are in a downturn dropped from 41% in April to 34% in May.

Those who believe that the economy is improving increased sharply by 9-points in April and pulled back slightly in May.

As the economy reopens, the employment situation is likely to improve. Most people are now more comfortable regularly working on-site at their places of employment. The outlook for the next few months is promising as more Americans are vaccinated.

TIPP surveyed 1,300 adults from April 28 to April 30 using an online survey of adults 18 or older nationwide.


ICYMI:  News Corp has completed its acquisition of Investor's Business Daily. We wish them both the best.


TIPP Takes

China Suspends Economic Dialogue With Australia As Relations Curdle

  • China suspends all activity under a China-Australia Strategic Economic Dialogue, its state economic planner says.
  • China's foreign ministry spokesman says the suspension is a "necessary and legitimate" response to Australia "abusing" the concept of national security.
  • Bilateral ties were strained in 2018 when Australia became the first country to publicly ban Chinese tech giant Huawei from its 5G network.
  • Last year, Australia demanded an independent investigation into the origins of the novel coronavirus, prompting China to retaliate with trade sanctions.

India-China Border Standoff Shows No Sign Of Easing 1 Year On

  • After a deadly standoff between the Indian and Chinese militaries along the Himalayan border, the two sides agreed to a partial troop pullout earlier this year, but negotiations have since stalled.
  • The lack of movement on that front has been attributed to India signing onto a robust Quad relationship with Japan, the U.S., and Australia.
  • The border clash is a major source of aggravation for China, given its rivalry with the U.S. Beijing claims the disputed territory as its own and cannot easily compromise on its stance.

North Korea May Mount Military Provocations Over South Korea-US Summit

  • Korea Herald says that under no circumstances should the US and South Korea take their eyes off the apparent goal of denuclearising the North completely.
  • The United States and the North swiftly entered a tense mode as Pyongyang condemned Washington's stance in its North Korea policy, of which the White House is said to have completed its review.
  • Inter-Korean ties were further strained as the North threatened the South with corresponding action for the recent release of anti-North Korean leaflets by a group of North Korean defectors.

Venezuela's Maduro Receives Samurai Sword Gift From Actor Steven Seagal

Steven Seagal, hero of martial arts films and now a Russian “special envoy”, gave President Maduro a Samurai sword, VENEZUELAN PRESIDENCY/AFP/GETTY IMAGES
  • Venezuelan President Nicolas Maduro received a samurai sword as a gift from actor Steven Seagal, who was visiting the South American country as a representative of Russia.
  • Maduro, wearing a white facemask and a traditional Venezuelan black long sleeve shirt, known as a liqui liqui, positioned the sword over his shoulder as Seagal nodded and pointed in affirmation.
  • Seagal, a U.S.-born martial artist, and film personality, has long been a public admirer of Russian President Putin and was presented with a Russian passport in 2016. He has also been tasked with improving ties between Moscow and Washington.

DR Congo Declares End Of Ebola Outbreak

  • Authorities say the disease has been contained thanks to vaccination drive as they continue to monitor the situation.
  • The response was often hampered by insecurity caused by armed groups, and social unrest limited the movement of health workers.
  • A much-feared viral disease that can lead to internal bleeding and organ failure, Ebola killed some 11,000 people in West Africa between 2013 and 2016.
  • “Huge credit must be given to the local health workers and the national authorities for their prompt response, tenacity, experience, and hard work that brought this outbreak under control,” said the WHO regional director for Africa.

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