Consumer confidence slipped back in January to 111.8, following an exceptionally strong surge in December to 113.3. The expected reading was 112.8. The change was driven entirely by the expectations component, which fell to 99.8 from 106.4. The assessment of the present situation increased to 129.7 from 123.5. The expectations component remains well above the 80 level, which is the lower band of its range in a normal recovery.
The rise in the present situation was due to improved sentiment toward both business and employment conditions. Those who found “jobs plentiful” increased from 26.0% to 27.4%. Those describing business conditions as “good” rose to 29.3% from 28.6%. With regard to consumers’ expectations, sentiment toward viewing business conditions as “better” was actually lower at 23.1% from 24.7%, and expectations for “more jobs” were also lower at 19.8% from 21.7%. Those anticipating higher incomes were lower at 18.0%, while those who expected a decrease in income rose to 9.6% from 8.6%. The percentage of respondents planning to buy a home was lower at 5.2%. Plans to purchase a new home were a little higher at 1.2% from 1.1%.
Confidence rose in January took a bit of a step back following a surge in the expectations component on the back of the Trump victory. Interestingly, almost all of the consumer confidence increase has come from the older segments of the population, particularly the over 55s. Why? Because Trump is promising them higher interest rates, lower estate taxes, lower income taxes, less regulation, lower corporate income taxes, and less foreign competition. Given that older age groups are the ones who have the most savings, own companies, and have inheritance to dispose of, these are all factors that will benefit them. The opposite response has been noted from the millennials, who have little in the way of savings and will therefore be hurt by higher interest rates, have no wealth to worry about passing down just yet, are not particularly bothered by regulations or corporate tax rates as they typically do not own businesses yet and are generally better traded and educated to deal with the threat from foreign competition. In aggregate, however, consumers are still in decent shape with a low unemployment rate, rising income, and higher levels of confidence. As far as the Fed is concerned, it will have to be extremely wary about the distributional effects of Trump’s proposed policies and how these might impact growth moving forward.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.