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Consumer Confidence is Misleading
The consumer confidence index is an index that measures the sentiments of U.S. consumers toward jobs and the economy. In September, this index rose, in part, from falling gas prices. The rise in the consumer confidence index suggests that consumers are becoming more optimistic about the economy. However, this cannot be the case for the reasons discussed below.
The U.S. economy is experiencing the highest inflation that we have seen in over 40 years. As a result, this makes goods and services more expensive to purchase which is putting pressure on household budgets. To combat this inflation, the Federal Reserve has been raising interest rates and expects to continue raising interest rates until inflation is under control. Therefore, the cost of borrowing will continue to increase which makes the purchases of more expensive items due to price increases even more costly.
Consumers have been absorbing price increases. However, this is no longer the case. Consumer good companies, such as Proctor & Gamble, report that they are no longer experiencing that price increases for their goods are not impacting the demand for those goods. Consumer goods are beginning to become more “price elastic” – meaning that price increases on consumer goods are leading to a reduction in the amount of the good being purchased.
Further, stocks are down over 20% from the beginning of the year, and U.S. home prices declined in July which represents the first monthly decline since January 2019.
As a result, the increase in the consumer confidence index should not be taken as a sign of a rosy outlook for the economy. Other economic indicators suggest that the U.S. is falling into a recession if we are not already in a recession.