CFE Analysis

Will the economy get worse?

The Conference board
Source: The Conference Board

Remember the sunny forecasts when the Pandemic began? This was to be a brief recession, followed by a “V” shaped recovery.

You could see that forecast in the consumer confidence numbers released each month by the Conference Board. The overall index is made up of two elements – present situation and expectations. The present situation index plunged as layoffs soared, but the expectations index held up. In June, that index was higher than it had been in January, well before the virus hit.

Now, people are not so confident. The preliminary reading for August, released today, shows that the present situation index, which had moved up nicely in June and July, fell this month. And the expectations index fell to its lowest level since 2016.

The Conference Board
Source: The Conference Board

The Conference Board index is based on consumers’ responses to the same five questions every month. The present situation is based on two of those questions: Are current business conditions good, bad or normal? Are jobs plentiful, hard to get, or not so plentiful?

The expectations index is partly based on forecasts of how the first two will change over the next six months. Will business conditions be better or worse? Will there be more jobs then?

None of those questions relate to what the consumer expects for his or her family, merely to how people view the overall economy. But the remaining question is personal: In six months, do you think your income will have increased, decreased, or remained about the same?

That is where worries are starting to show. The latest survey has only 12.7% of people expecting their income will rise – the smallest proportion since 2010, in the aftermath of the financial crisis. More people expect declines, and the difference is greater than at any time since early 2013.

It is a stunning change. Last summer, Americans were more optimistic about their own income prospects than at any time since late 2000. Now they are the most pessimistic they have been in seven years.

Those numbers are not to be viewed as a likely accurate forecast – although it might become one if Congress cannot agree on more fiscal stimulus soon. In 2010, when pessimism reigned, the economy was set to take off, employment going up every month for nearly a decade – an unprecedented stretch. In early 2001 with optimism firmly in place, a recession was set to begin.

But to the extent the figures measure changes in sentiment, they could be significant as the election approaches, particularly if the three month string of job gains, from May though July, ends when the August numbers are released September 4. Those who expect bad news may be more likely to believe it if it does arrive.