U.S. Consumers Feeling Topsy-Turvy As 2021 Draws To A Close

Americans are feeling better about their economic prospects than they did one year ago, but they seem decidedly more pessimistic than in the rosy days of summer, according to the most recent Forbes Advisor-Ipsos Consumer Confidence Weekly Tracker.

The headline confidence index declined slightly to 55.1 in the Dec. 14-15 survey, down from 55.9 two weeks prior. The index is up more than 10% from the same period in December 2020 but is well below the 2021 high of 62.4, seen in the final weeks of June.

This denouement corresponds with broader U.S. economic trends and the ongoing Covid-19 pandemic. Over the summer, vaccines had raised hopes that life might begin returning to normal, boosting confidence. Today, Covid cases have begun surging again, thanks to the omicron variant, undercutting U.S. consumer confidence.

Meanwhile, rising inflation has burned hotter and lasted longer than predicted. As a result, average American workers are seeing stagnant or falling wages, despite the economic recovery.

With the onset of omicron, Americans are left in a somewhat similar situation as they were this time last year, facing a difficult winter in the new year and unsure of when the pandemic might fade.

“I don’t think Covid’s leaving anytime soon,” said Jim Paulsen, chief investment strategist at Leuthold Group.

Consumer Confidence and Covid’s Vicissitudes

One year ago, Americans were in the midst of a winter surge in Covid-19 cases, although the spring of 2021 brought hope as the distribution of vaccines ramped up nationwide. By the middle of June, Covid cases had dipped to a seven-day average of under 12,000, compared to almost 250,000 six months earlier.

State and local governments began relaxing social distancing regulations, people began traveling more frequently and Dr. Anthony Fauci told Americans that vaccinated Americans represented a “dead end” for the virus.

With vaccination rates on the rise, Americans were looking forward to a “summer of freedom,” as President Joe Biden put it in June. The Forbes Advisor-Ipsos survey wasn’t the only metric showing that Americans were feeling good: The University of Michigan Consumer Confidence index hit 85.5 in June, up from 79 in January.

These feelings of hope were dampened as the delta variant took hold throughout the summer and into the fall, however. Daily case counts would ultimately rise to more than 160,000 while the CDC reversed its guidance and recommended vaccinated Americans wear masks while indoors.

Over the second half of the year, consumer confidence as measured by the Forbes Advisor-Ipsos Weekly Tracker slipped lower as it became ever more apparent that the nation would not return to the pre-pandemic normalcy anytime soon, hastened by the arrival of the omicron variant after Thanksgiving.

Inflation Struggles

The U.S. inflation saga has followed a similar trend. In early March 2021, Fed Chair Jerome Powell told markets that he believed inflation would heat up temporarily as the economy reopened. He cited two causes: Prices would rise over a year prior, when most of the economy was shut down and prices fell—so-called base effects—and companies needed time to ramp up production again to meet consumer demand.

While Powell believed those forces would produce higher inflation, he asserted it would be “transitory.” Unfortunately, this forecast has not proven correct, and by the end of 2021 Powell was admitting that the Fed had got its forecasts wrong.

The November Consumer Price Index (CPI) showed that inflation rose by 6.8% over the past 12 months to an almost-four-decade high. Even worse for workers was the fact that wages haven’t held up: Inflation-adjusted earnings declined by 1.9% over the same period.

To maintain the same standard of living from the year prior, families would need to spend an extra $3,500 in 2021, according to analysis by the University of Pennsylvania, which accounted for most of the direct stimulus payments families received earlier in the year.

It’s no wonder, then, that the current sub-index of the Forbes Advisor-Ipsos survey that asks respondents to rate their current financial situation sits at just 46.9, roughly equal to where it was in the dark days of February 2021.

Jobs and Investments

While wage growth may not have kept pace with inflation, Americans do feel confident that they’ll have jobs, according to the Forbes Advisor-Ipsos survey. The jobs sub-index hit 67.0, sustaining the strong trend that we’ve seen since the recovery took hold in early 2021.

That dovetails with labor market performance throughout 2021. The unemployment rate has steadily dropped to 4.2%, close to its level before the pandemic began. Workers are quitting their jobs in droves or are starting their own small businesses under the belief they can make more money elsewhere.

Perhaps our more interesting finding concerns investor confidence, which showed a level of just 49.1, or 5.5 points lower than early March 2020.

You’d think investors would be feeling quite comfortable with the S&P 500 up more than 23% year to date, after rising 16% in 2020 and 29% the year before. But life is pretty grim for bond investors, who’ve had to struggle through low yields and inflation, making things harder for those with a shorter investing timeline.

That may change in 2022, as the Fed looks poised to increase short-term interest rates perhaps as many as three times to stamp out inflation. Meanwhile, the low 10-year Treasury yield demonstrates bond market investors don’t think the economy will continue to grow so fast for too much longer.

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