The Higgins Report: Confidence in Consumer Confidence

If Americans keep spending and the job market holds up, we might just avoid the ‘R’ word

By Joe Higgins, Quest 4 Quality

Consumer confidence tells us two things about the economy: How consumers feel about their current and future financial situation and whether they will spend money on goods and services.

The August report from The Conference Board indicated that optimism is more pervasive among Americans today as jobs are plentiful and gas prices are declining. The Consumer Confidence Index increased from 95.3 to 103.2 in August, representing the first gain since April 2022. An eight-point rise on the index is significant and predicts better times ahead, but there are still plenty of landmines in our future.

Consumers have been battered this past year with rising interest rates, skyrocketing housing prices, mortgage rates approaching 6% and inflation that’s at its highest rate in 40 years. After six months of interest rate hikes, the cost of money has caused customers to back off discretionary items like automobiles, appliances and furniture. This has been an essential factor in the current reduction in gross domestic product (GDP).

Reading deeper into the report, its authors said that purchasing plans for durable goods like cars and appliances have gained momentum since May, which is a positive for our industry. However, consumers will also be spending more on services this year, as vacations were much higher priorities than they were two months prior.

Consumer confidence is a leading economic indicator and the index is pointing in a positive direction. But there will be more rate hikes by the Fed, housing is still in short supply and inflation is not going away. We need to see another month or two of rising confidence from consumers to know if spending holds up through year end.

Inflation and the CPI

The Consumer Price Index (CPI) was released last week by the U.S. Bureau of Labor Statistics and the news was disappointing. Economists expected to see a moderation of the current inflationary cycle but instead inflation increased, with August prices up 0.1% from July and 8.3% over last year. All of us, including consumers and businesses, were hoping that falling gas prices would be reflected in the numbers.

The most significant increase was in food, up 1.1%, while gasoline was down 7.7%. The fact that gas has dropped more than any other commodity is an immense help to our dealers, who deliver appliances, furniture and electronics on trucks and vans that typically get poor mileage. Gasoline has been in a 13-week spiral, down to the point where the national average for a gallon of petrol is $3.71, after topping out at $5.09 in June.

The Automobile Club of America believes that average gas prices could go as low as $2.99 by the end of 2022. But two scenarios could drastically affect the price of fuel over the next four months. The first would be a natural disaster like a hurricane along the Gulf Coast, where much of our oil is refined, which would spike up pricing once again. The other event would be an end to the war in Ukraine, which would allow Russian oil to get back into the global market and bring gas prices even lower.

Last week’s CPI numbers rocked the stock market. The Dow Jones lost 1,246 points upon the CPI’s release, since rising prices mean the Federal Reserve will have to continue raising interest rates, and perhaps more aggressively. The Fed has raised interest rates by 225 basis points since April, including last month’s shocking 75-basis-point increase. Some experts now think the next increase will be 100 basis points. The pace of these hikes is staggering; America has not seen anything like this in 40 years.

The bottom line is that we are still in a period of rising prices. As the Fed increases interest rates, the economy will slow to a crawl, which could cause a recession. But if the Fed gets it right, they could get us back to the goal of holding inflation at 2% and employment below 4%.

We need Americans to remain confident in the economy. If the job market doesn’t tank and consumers keep on spending, we just may avoid a recession. It may be unlikely, but all we can do at this point is hope that Fed chair and economic pilot Jerome Powell makes his “soft landing.”

Joe Higgins is a 45-year veteran of GE and Whirlpool Corp. who brings his experience to bear as a business consultant, public speaker, AVB keynoter and YSN contributor. Visit his website, Quest 4 Quality with Joe, at www.q4qwithjoe.com.