Head of Global Economics
BofA Global Research
After plunging in March and April, both the University of Michigan and Conference Board measures of consumer confidence leveled off in May and even partly recovered in June, despite the spike in coronavirus cases in the Sun Belt. Confidence measures have certainly slipped, but they have still held up better in this cycle even with job and GDP losses that are much greater than the big recessions of 1981-82 and 2008-09.
Digging deeper, we also find that consumers are more confident about the future than current conditions. This is typical of the latter stages of a downturn. Normally, indexes tracking consumers’ expectations for the future pick up a few months before the end of a recession. But this time even the decline in expectations going into the downturn was modest.
We think consumers believe in a relatively robust recovery; a belief underpinned by massive stimulus for lower-income and unemployed workers, improvement in the data as states started to reopen, and general faith in macro policy. Most important for consumers, tax refunds, lower tax payments and massive unemployment aid have more than offset the loss of labor income. Between February and May, disposable income surged by $900 billion on an annualized basis – the biggest three month increase ever — even though labor income fell by nearly double that amount. Indeed, for many of the newly unemployed, the benefits from the stimulus package exceeded their former income. Aggressive monetary stimulus by the Federal Reserve has further fueled confidence by underpinning an almost full recovery in the stock market. Now there seems to be strong faith among Americans that if the current economic recovery falters, the Fed and fiscal policymakers will step in again to save the day.
The hope is that stimulus will continue to support consumer confidence until it becomes a self-fulfilling prophecy: The more people are confident about the future, the more they will spend, which in turn boosts businesses and helps to speed up the economic and labor-market recovery.
But the flipside is that the U.S. economy is doubly dependent on another round of stimulus. We will run into an important fiscal cliff at the end of this month, when the $600/week supplement to unemployment insurance expires. It will be interesting to see how quickly and to what extent the fiscal authorities deal with this. Consumer confidence could crack if any income holes arise from a delay in another round of stimulus at the end of July.
The bottom line is that we think it’s too early to declare victory on the economic recovery. The next few months will be critical. We will learn whether changes in social distancing policies around the country impact the recovery, how much additional macro stimulus we’ll get and whether consumer confidence continues to hold up.
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