The IBD/TIPP Economic Optimism Index, a leading measure of consumer confidence, declined 4.3 points, or 9.5%, from 45.5 in April to 41.2 in May.
In September of last year, the index fell below 50.0, defined as the pessimistic zone, and has remained there for nine consecutive months.
Confidence in May is 31% below its pre-pandemic level of 59.8, recorded in February 2020.
The IBD/TIPP Economic Optimism Index is the first monthly measure of consumer confidence. It accurately predicts monthly changes in sentiment reflected in other well-known surveys conducted by The Conference Board and the University of Michigan. Consumer spending drives two-thirds of the economy. Optimistic consumers spend money on automobiles, home improvements, new homes, and other large-ticket items.
The TIPP Economic Optimism Index is the most well-known of our TIPP indexes. Investor’s Business Daily publishes the IBD/TIPP Economic Optimism Index every month.
Multiple factors are behind the decline of the index and its components.
Paying bills and making ends meet are big concerns for Americans. Inflation is an added tax, and each household is spending close to $250 more a month because of it.
The stock market correction and volatility are adding to the gloom.
Geopolitical turmoil has offset the positive gains from the pandemic recovery. The Russia-Ukraine conflict, the impact of sanctions, and gasoline prices exacerbate inflation.
Fears of an economic recession are running high. Americans are staring at the possibility of protracted stagflation.
Due to decades of globalization and reliance on China, the American and Chinese economies have strong ties. Driven by its zero-Covid policies, Chinese manufacturing is slowing down, which will likely cause further supply chain hiccups.
Factors like wage growth, inflation, and taxes lessen economic confidence.
In summary, Americans see a dark economic outlook.
IBD/TIPP Economic Optimism Index
The flagship index has three equally weighted components. For the index and its components, a reading above 50.0 signals optimism, and a reading below 50.0 indicates pessimism. All three index components fell in May.
The Six-Month Economic Outlook, a measure of consumers’ feelings about the economy’s prospects in the next six months, declined 6.5 points, or 16.4%, to 33.2 in May. This is the component’s lowest reading since August 2011 (31.7). The component has fallen 42.0% since February 2020, the most among the three components of the optimism index. The component has shown the highest variability during the pandemic, with a standard deviation of 6.7.
The Personal Financial Outlook, a measure of how Americans feel about their personal finances in the next six months, dropped 1.8 points, or 3.4%, to 50.4 this month. In March, it slipped into the pessimism territory, below 50, after staying in the optimism zone for 20 consecutive months. But, in April, it posted 52.2 and rebounded quickly into the positive zone. This component has fallen 22% since February 2020. It has the lowest variability with a standard deviation of 3.4.
Confidence in Federal Economic Policies, a proprietary IBD/TIPP measure of how government economic policies are working, according to Americans, declined 4.4 points, or 9.9%, to 40.1 in May. The component’s previous low of 40.1 was in December 2015. Confidence in Federal Economic Policies has fallen 31% since February 2020. The standard deviation for this component is 5.1.
Party Dynamics
In general, people who belong to the president’s party are more optimistic about the economy than people who belong to the opposition.
Democrats have the highest confidence level at 62.2, followed by independents at 32.8 and Republicans at 24.0.
Democrats have stayed in the positive zone for all 18 months since December 2020, the month after Biden won the election. Their confidence rose from 32.9 in September 2020 to 73.8 in April 2021. However, it has dropped gradually to 62.2, down 11.6 points or 16% over the last thirteen months.
Republicans have stayed in the pessimistic territory for 18 consecutive months after Biden was elected. Republicans’ confidence is down 56.9points, or 70% lower than its pre-pandemic reading in February 2020.
Independents’ confidence declined 4.1 points to 32.8, which is 27.1 points, or 45% lower than its pre-pandemic reading in February 2020. Independents have stayed in pessimistic territory for 26consecutive months since April 2020, which does not help the incumbents in the midterm elections slated for November 2022.
Investor Confidence
IBD/TIPPconsiders respondents to be “investors” if they currently have at least $10,000 invested in the stock market, either personally or jointly with a spouse, either directly or through a retirement plan. We classified 36% of survey respondents who met this criterion as investors and the remaining 60% as non-investors. We could not ascertain the status of 5% of respondents.
In May, investors declined from 52.0 to 47.4, 4.6 points, or 9%, and non-investors dropped sharply from 41.7 to 38.0, 3.7 points, or 9%.
The economic optimism gap between investors and non-investors is 9.4 points in May, widening from 6.1 in January. In August 2021, the economic optimism gap between investors and non-investors was 17.3 points, a record high in the 21-year history of the IBD/TIPP Economic Optimism Index.
IBD‘s market direction indicator shows the stock market is under correction. As of Monday’s close, the S&P 500 has pulled back 788.55 points, or 16.4% year-to-date, and the Dow has dropped 4,361.64 points, or 11.92%. The tech-heavy Nasdaq index has slumped 4,170.01 or 26.34% year-to-date. It is in the vicinity of bear-market territory.
Tech stocks have taken a beating, with Facebook (Meta) down 40.9% YTD, Amazon down 35.0%, Netflix down 68.8%, and Google (Alphabet) down 20.9%.
Momentum
Comparing a measure’s short-term average to its long-term average is one way to detect its underlying momentum. For example, the indicator is bullish if the 3-month average is higher than the 6-month average. The same holds if the 6-month average exceeds the 12-month average.
In May, except for the Personal Financial Outlook component, all index readings were lower than their three-month moving averages, signaling a slowdown.
Furthermore, the three-month moving averages are lower than their six-month moving averages in all cases. And the six-month moving averages are lower than their 12-month counterparts.
As a result, the data presents a convincing picture of weakening economic confidence.
Inflation
Eighty-eight percent of our survey respondents are worried about inflation.
Concerns were greatest among individuals aged 65 and older and households in the $30K-$50K bracket.
By Age
74% among those aged 18 to 24 (down from 76% in April)
86% for age 25 to 44 (down from 87%)
91% for age 45 to 64 (down from 92%)
96% for age 65+ (up from 92%)
By Household Income
85% for households under $30K income (up from 82% in April)
93% for the $30K to $50K households (up from 92%)
90% for the $50K to $75K bracket (up from 89%)
91% for $75K+ (down from 94%).
According to the Consumer Price Index (CPI), inflation rose 0.3 percent in April, rising 8.3 percent between April 2021 and April 2022.
Compared to a year ago, Americans are paying 81% more for fuel oil, 44% more for gasoline, and 23% for natural gas. Food prices have increased by 9.4%, while experts say it may be closer to double digits.
As employers compete for scarce labor, wages have risen. In the latest jobs report, average hourly earnings rose by 10 cents, or 0.3 percent, to $31.85. The year-on-year increase was 5.5%.
Most respondents (51%) say their wages have not kept pace with inflation. Only one in six (18%) say that it has.
Per Newton’s third law, for every action, there is an equal and opposite reaction. It applies even to economics. As a result of inflation, Americans are cutting back on household spending.
Almost three-quarters (72%) of respondents said they cut back on household spending. Cutting expenses was seen among people of all ages and income levels.
Among those cutting back, most cuts are happening in entertainment (91%), eating out (89%), holiday/vacation travel (89%), and memberships/subscription cancellations (83%).
The high gasoline prices are forcing 73% to cut back on local driving. Many (72%) are cutting back on even good causes such as charity giving. Over two-thirds (67%) of households are watching grocery expenses.
Most Americans (60%) are also postponing the purchase of big-ticket items, which will lead to reduced consumer spending and could result in an overall slowdown in the economy.
The Federal Reserve believes that long-run inflation of 2%, measured by the annual change in the price index for personal consumption expenditures, is most consistent with its maximum employment and price stability mandate.
In early May, the Fed raised interest rates by 50 basis points to 0.75 percent, the largest increase in 20 years. The Fed also signaled tighter monetary policy to tame inflation by taking additional steps to reduce its $9 trillion balance sheet.
Recession
In July 2021, the National Bureau of Economic Research’s Business Cycle Dating Committee determined that the recession started in March 2020 and ended in April 2020. The recession lasted just two months, making it the shortest on record in the United States. May 2020 was the first month of the expansion.
However, the economy has not yet returned to normalcy, as evidenced by our data. Almost one-half (48%) believe that we are in a recession, and 28% are unsure.23% believe we are not in a recession. Those who believe that we are in a recession climbed from 45% in March to 47% in April and 48% in May.
About one-fifth (23%) believe that the U.S. economy is improving, while most (61%) think it is not improving.
In summary, economic confidence is low. Geopolitical uncertainties persist, threatening global economic equilibrium. Inflation will persist for the foreseeable future, and it will be a key campaign issue in November 2022.
The risks of stagflation, or high inflation with a recession, are significant. The wage growth is not keeping pace with inflation. Persisting inflation is likely to further weaken economic confidence. The data signals a recession around the corner; how soon is the question.
TIPP polled 1,320 adults nationwide via an online survey from May 4 to May 6.
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