Consumer confidence (January 1990=100). Misery index based on unemployment rate in % plus the annual % change in the consumer price index. Monthly data. Sources: The Conference Board, BLS, Peel Hunt
Not too bad at all: Healthy economic growth, low unemployment, and tolerable rates of inflation. The situation for US consumers remains fairly rosy. Our chart of the week compares the US misery index—inflation plus the unemployment rate—to consumer confidence. Unsurprisingly, the correlation is fairly strong. Consumers like low inflation and low unemployment. They dislike high inflation and high unemployment.
Mind the lag: Following big shocks, such as in the early 2000s after the Dot-Com bubble burst and 9//11, and after the 2008-09 global financial crisis, recovering consumer confidence tends to lag economic fundamentals. Looking at the recent picture, this pattern seems to be playing out again. Relative to the level predicted by the recent trend in the misery index (including the 4.2% unemployment rate in November and our 2.6% YoY inflation estimate) confidence remains on the low side. That is probably due to three factors: 1) although inflation has moderated, consumers are still feeling the pinch from the big jump in the overall level of prices in 2022 and 2023; 2) credit conditions remain restrictive in response to still-tight Federal Reserve (Fed) monetary policy; and 3) recent noisy elections at home and an uneasy global geopolitical backdrop may be keeping consumers somewhat on edge.
Better times ahead: While President-elect Donald Trump's policy mix of tax cuts, deregulation, trade tariffs and immigration curbs involves a host of two-sided risks, chances are that the US will continue to expand at a healthy clip over the medium-term. After an outsized 2.8% YoY rise in real GDP in 2024, we project growth at rates closer US potential of c.2.0% over the medium-term as well as continued low unemployment and modest, but not excessively, high inflation in the 2.5-3.0% range. Remember, the stronger dollar in response to worries about US import tariffs can partly offset their impact on US consumer prices. If our call roughly plays out, consumer confidence can edge higher to levels consistent with the underlying labour market and inflation picture.
