By tippinsights Editorial Board, TIPP Insights

The IBD/TIPP Economic Optimism Index, a leading measure of consumer confidence, declined 3.0 points, or 6.8%, from 44.0 in February to 41.0 in March, the lowest since October 2013.

The index had dropped both in January and February. In September of last year, the index fell below 50.0, defined as the pessimistic zone, and has remained there for seven consecutive months.

Confidence in March 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 oil 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 U.S. and China’s economies have strong ties. Besides a real estate and debt crisis, China is experiencing an energy shortage. Chinese manufacturing is slowing down, which will likely cause further supply chain hiccups.
• Factors like unemployment, wage growth, inflation, and taxes lessen economic confidence.

In summary, Americans don’t see the outlook as bright.

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. Two of the three index components fell in March.

The Six-Month Economic Outlook, a measure of consumers’ feelings about the economy’s prospects in the next six months, declined 5.0 points, or 12.9%, to 33.9 in March. This was the component’s lowest reading since August 2011 (31.7). The component has fallen 41.0% since February 2020, the most among the three components of the optimism index. The component has shown the highest variability since the beginning of the pandemic, with a standard deviation of 6.4.

The Personal Financial Outlook, a measure of how Americans feel about their personal finances in the next six months, dropped 4.1 points, or 8.0%, to 47.3 this month. It slipped into the pessimism territory, below 50, after staying in the optimism zone for 20 months in a row. March’s 47.3 undercut June 2020’s prior recent low of 49.8. This component has fallen 27% since February 2020. It has the lowest variability with a standard deviation of 3.5.

Confidence in Federal Economic Policies, a proprietary IBD/TIPP measure of how government economic policies are working, according to Americans, edged up 0.2 points, or 0.5%, to 41.9 in March. Confidence in Federal Economic Policies has fallen 28% since February 2020. The standard deviation for this component is 5.0.

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 58.5, followed by independents at 35.9 and Republicans at 24.3.

Democrats have stayed in the positive zone for all 16 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 58.5, down 15.3 points or 21% over the last nine months.

Republicans have stayed in the pessimistic territory after Biden was elected. Republicans’ confidence declined sharply by 6.1 points to 24.3 in March, and it is 56.6 points, or 70% lower than its pre-pandemic reading in February 2020.

Independents’ confidence declined 1.5 points to 35.9, which is 24.0 points, or 40% lower than its pre-pandemic reading in February 2020. Independents have stayed in pessimistic territory for 24 consecutive months since April 2020, which does not help the incumbents in the midterm elections slated for November 2022.

Investor Confidence

IBD/TIPP considers 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 33% of survey respondents who met this criterion as investors and the remaining 62% as non-investors. We could not ascertain the status of 5% of respondents.

In March, investors declined from 48.8 to 47.0,0.4 points, or 1%, the lowest level since September 2016, and non-investors dropped sharply from 42.6 to 37.8, 4.8 points, or 11%.

The economic optimism gap between investors and non-investors is 8.8 points in March, widening from 6.1 in January. In August 2020, 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 Friday’s close, the S&P 500 has pulled back 592.25 points, or 12.35% year-to-date, and the Dow has dropped 3,640.87 points or 9.95%. The tech-heavy Nasdaq index, down more than 20% from its peak, has slumped 2,988.99 or 18.9% year-to-date. It is in the vicinity of bear-market territory.

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 March, all three 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. 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.

Demographic Analysis

The number of groups in the positive territory signals the breadth of confidence among the survey respondents.

In March, only three of the 21 demographic categories we track are in the positive territory. The groups are age 25-44, Democrats, and Black/Hispanic.

The inference is most demographic groups are glum.

For comparison, in January 2020, 20 of the 21 groups felt confident before the pandemic. We were recovering in June 2021 with 18 upbeat groups, only to fall to four in November due to the Delta variant. In December, seven groups were upbeat, dropping to five in January and 3 in February and March.

In March, only three demographic groups (age 25 to 44, Southerners and Democrats) saw their economic optimism index scores rise. An increase indicates strengthened confidence.

Inflation

Eighty-four percent of our survey respondents are worried about inflation.

Concerns were greatest among individuals aged 45 and older and households earning more than $50,000.

By Age

• 72% among age 18 to 24 (down from 78% in February)
• 81% for age 25 to 44 (up from 79%)
• 88% for age 45 to 64 (down from 90%)
• 94% for age 65+ (up from 89%)

By Household Income

• 81% for households under $30K income (down from 83% in February)
• 84% for $30K to $50K households (no change from February)
• 89% for $50K to $75K bracket (down from 91%)
• 92% for $75K+ (up from 90%)

As measured by the CPI, inflation surged to 7.9% in February, the biggest increase in nearly 40 years.

Compared to a year ago, Americans are paying 38% more for gasoline, 26% more for energy, and 24% for natural gas. Officially, food prices have increased by 7.9%, while experts say it may be closer to double digits.

As employers compete for scarce labor, wages have risen. In the February jobs report, wage growth was flat, with average hourly earnings rising only a penny to $31.58. The year-on-year increase was 5.1%.

One in five (19%) survey respondents say that their wages have kept pace with inflation. 49% say they haven’t kept pace.

Per Newton’s third law, for every action, there is an equal and opposite reaction. It applies in even economics. As a result of inflation, Americans are cutting back on household spending.

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 2022, economists expect the Fed to raise interest rates by seven 25 basis point increments. Next week, the Fed is certain to announce the first quarter-point rate increase.

The Fed purchased government-backed bonds each month until early March to boost liquidity.

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. 45% of Americans believe we are still in a recession, and 29% are unsure.24% believe we are not in a recession. Those who believe that we are in a recession climbed from 41% in February to 45% in March.

About a quarter (26%) believe that the U.S. economy is improving, while over one-half (57%) think it is not improving.

In summary, economic optimism is low. Geopolitical uncertainties persist, threatening global economic equilibrium. Inflation will plague us for the foreseeable future. The risks of stagflation, or high inflation with a recession, are significant. The wage growth is not keeping pace with inflation. If inflation continues to rise, economic confidence may suffer even more. Inflation will almost be a key campaign issue in November 2022.

TIPP polled 1,318 adults nationwide via an online survey from March 2 to March 4.

READ MORE AT TIPP INSIGHTS

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