Slipping confidence hard to square with resilient spending

Summary

Confidence is slipping among consumers amid concern about the current labor market situation as well as future business conditions and whether income can keep up.

Hey big spender, why so glum?

Consumer confidence dropped in April to 97.0, the second-lowest level in the past three years. The assessment of the present situation dipped only modestly from 146.8 to 142.9; the larger drop was in the forward-looking expectation component which slipped to 66.4 from 74.0 last month. There have only been two other months in the past decade when expectations were lower.

An aspect of this that is tricky to rationalize is how consumer spending can remain so strong even as morale can be so low. It may be that in order to sustain the breakneck pace of spending, consumers are spreading themselves thin. In last week's personal income and spending report, we learned that real disposable personal income grew 0.2% in March, yet consumers ratcheted up spending at an even faster rate with real spending up 0.5% during the period. While it is true that household income is outpacing inflation, it is also true that spending is outpacing income. In order to do that, consumers are reducing the amount they set aside for a rainy day to make up the difference. The saving rate fell in March to 3.2%, a rate that is lower than at any other point in the past year.

Prices at the pump are not helping. The only other times in the past decade when expectations were lower than they are today was in the summer of 2022 when gasoline prices climbed above $5/gallon. With the national average price for a gallon of gas at the end of April around $3.66, we are a far cry from the summer of 2022, but prices have been steadily climbing all year, up another 3.5% just during the month of April.

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