So are they going to spend less?
These are the American Consumers Hit by Brexit, Global “Uncertainty” Hurt Feelings of High-Income American Consumers
American consumers, who are supposed to keep the economy afloat, are getting antsy. But this time, it’s not the fault of consumers who saw the purchasing power of their stagnant incomes get whittled down by inflation year after year, or those who suffered pay cuts or layoffs. This time, it’s consumers who’ve been floating on top of the American economy. And Brexit did it.
The University of Michigan Index of Consumer Sentiment in July dropped 4.3% from the prior month to 89.5, the lowest since April. This is also down 3.9% from a year ago, and down 8.8% from its post-Financial Crisis peak in January 2015 of 98.1.
At the time, it wasn’t that the economy had gotten that much better for American consumers. They were just getting used to the economy they had, and they settled in, making do with what was available. Humans can be morose for only so long.
This peak in January 2015 had given rise to hopes that consumers would somehow start splurging again, buying things and services they didn’t need with money they didn’t have and get deeper into debt – because that’s what these surveys are all about: will consumers go out on a limb and borrow more and spend more?
But instead, consumer sentiment has zigzagged lower since.
It didn’t impact all that much the Current Economic Conditions index, which in July, edged down 1.9% from the prior month, to 108.7, and is up 1.4% from a year ago. But the Index of Consumer Expectations plunged 6.4% in July to 77.1, the lowest since September 2014, and is down 8.3% from a year ago.
So who and what exactly dragged down the sentiment about the prospects for the US economy? “High income households” and Brexit!
Richard Curtin, chief economist at Surveys of Consumers, put it this way in the report:
Prior to the Brexit vote, virtually no consumer thought the issue would have the slightest impact on the U.S. economy. Following the Brexit vote, it was mentioned by record numbers of consumers, especially high income consumers.
Turns out, 24% of households with incomes in the top third – the beneficiaries of the Fed-engineered economy – fretted about Brexit when the survey asked them “to identify any recent economic news that they had heard” (emphasis added):
For these households, the initial impact on domestic stock prices translated Brexit into personal wealth losses. While stock prices quickly rebounded, an underlying sense of uncertainty about global prospects as well as the outlook for the domestic economy have not faded.
Will these high-income households, or any households, respond to Brexit, the global uncertainty, and issues in the US economy by cutting back their spending? It appears not. They got their feelings hurt, and they didn’t like the chaos and the volatility, and they don’t know where it all might lead to, but they’re going to go on spending at the same languid pace as before, according to the report:
Importantly, the least affected components have been personal finances and buying plans. Real consumer spending can be expected to rise by 2.7% in both 2016 and 2017.
So muted optimism continues to reign.
Alas, factor inflation into this 2.7% expected growth in consumer spending…. Inflation is stirring. Prices without food and energy rose 2.3% from a year ago, with shelter costs up 3.5%, according to the Bureau of Labor Statistics today. And that’s about what consumer spending in the languishing US economy has looked like for the past few years, based on the simple fact that high-income households aren’t spending enough to make up for the day-to-day struggles of the households in the bottom two-thirds of the American economic pyramid.
These households are trapped between the asset bubbles all around them that others have benefited from. Read… Why this Won’t Work out: Rampant Rent Inflation Collides with Stagnant Incomes