Consumer Confidence Shrinks: Valid or Not?

According to the Conference Board, U.S. consumers were less confident in the economy in November than in previous months. This is blamed on the recent government shutdown, weak hiring, and stubborn inflation. The confidence index dropped to 88.7 in November from an October reading of 95.5, and it’s the lowest reading since April. Is this confidence level a valid one, or just a perceived level based on what we are influenced to believe? The following is an examination.

The confidence level is based on 1985 being rated at 100. So let’s look at 1985. Inflation was 3.5%, about what it is today. The only difference? In 1985, that was the lowest rate in 12 years. From 1973-82, the inflation rate was never lower than 6%. From 1979-82, it was never lower than 10%. Perspective matters.

Unemployment in 1985 was over 7%, following several years where unemployment rates had hit 10%-plus. I was in my 20’s during that time. A good job was almost impossible to find – something people are claiming today as they beg for $20 per hour jobs anyone off the street could do with little training. I was fortunate. I made $17.6k ($52.9k today) working skilled labor and putting in 50 hours per week.

Mortgage rates in 1985 averaged 11.8%. According to bankrate.com, the average 30-year mortgage rate now sits at 6.33%. Today’s $400,000 home with 10% down and 1985 rates would result in a $2.425 monthly payment BEFORE real estate taxes and mortgage insurance are added in.

Upswings and downswings play a major role in the confidence factor. Economic statistics from 1985 would be considered completely horrendous if they occurred today. However, in 1985, those statistics were reason to go out, get drunk, and celebrate. Compared to the economic horrors of the preceding ten years, the mid-80’s were glorious. Today’s statistics, far better than 1985, get compared to 21st century 2% inflation, 3% unemployment, and 3% interest. Again, perspective matters, at least to Boomers having lived in both periods, which brings up an irony.

Boomers allegedly are the least confident. Why? Health care? Lack of savings? In fact, those over the age of 35 are less confident about today than those under 35, which seems illogical based on social media and news reports.

More Conference Board stats: 25% rate their current financial situation as good vs 22% bad; 30% rate their future financial status as good vs 18% as bad; 64% rate a recession in the next 12 months as either ‘not likely’ or ‘somewhat likely’ vs 36% ‘likely’ or ‘already in one’. Today’s confidence level is still higher to, or equal to, any of the Obama years. In addition, the economy is growing at a 3% rate – a rate Obama never saw in his eight years as president.

Less-confident consumers may spend less, though the connection doesn’t always play out. In recent years, consumer spending has held up even when data implies they’ve grown more worried. Americans continue to have affordability concerns, as they should, but that level of concern needs some added perspective. Things have been worse, much worse, and not just once.

Source used: Associated Press