In the inaugural episode of the Eyes on The Economy, our Chief Economist Avery Shenfeld, takes a closer look at the US economy – exploring the dichotomy that exists between the current data, which shows that the economy has been performing strongly, and polls, which would suggest the sentiment is not as positive for the average American consumer. Listen now to hear insights on what truly matters behind the numbers.
Introduction: Welcome to Eyes on the Economy by CIBC Capital Markets. A podcast series dedicated to addressing current issues in a concise format, helping to make sense of the evolving economic complexities, so that you can take action.
Avery Shenfeld: Thank you for joining us today on Eyes on the Economy. I'm Avery Shenfeld, the Chief Economist at CIBC. Today we're taking a deep dive into the US household sector and looking at a particular anomaly that we're seeing these days, which is that polls of Americans are showing that they're not all that happy about the state of the economy, yet the actual behavior of Americans in terms of consumer spending has actually been quite brisk and the actual hard data on the economy, whether it's the fact that the unemployment rate has been below 4% for an extended stretch or inflation has come down, been cut in half from its earlier peak. Those are all signs of a strong economy that usually would go with much stronger polling on the state of the economy and on household confidence. And since this is an election year, and as Bill Clinton's advisor once said, It's the economy, stupid, meaning that usually the economy drives elections. This is also going to be important for forecasts of who winds up winning the White House in November with all the implications that could have for economic policy, not only in the U S but trade policy that it can impact Canada as well. And we're also looking at a U S economy that has been outperforming the rest of the world, that has been frustrating the Fed, which is looking for signs of a slowdown.
And so it really is the health of the consumer that is paramount right now on people's minds. So why is it that we're seeing this dichotomy between consumer behavior showing strength and a strong economy and polling that shows the American population not quite as exuberant about the state of the economy? In part, I think it comes down to politics. Polls do show that when Democrats are asked about how the economy is doing, they're much more likely to give a favorable response than those who are registered as Republicans. And that means that social media filter these sorts of things, as well as political speeches, in a way that Republicans are hearing worse things about the economy than Democrats. So each side is seeing a different set of facts on the economy, as it were, in terms of how well it's doing. I think it's also a bit of an asymmetry in terms of how households think about inflation. Economists think of inflation as the rate of change from one period to the next, and that's where we're seeing some improvement. Inflation has indeed slowed. Whereas the typical American might be thinking about the level of prices, asking themselves, why is it so expensive, for example, to go out to dinner these days? And they're really thinking about the total rise in prices since the pandemic first hit, which is still looking quite high. So the rate of change prices has slowed, but the level of prices in most cases is not reversing that earlier run-up, which impacts how people think about the economy. The economist Larry Summers also made an interesting observation about how inflation is measured in the US, and one missing piece in that measurement that may be affecting household perceptions. Here in Canada, the CPI includes a measure for mortgage interest costs. So if your mortgage rate has gone up, it actually shows up in a higher rate of inflation. The US measures only the cost of renting a house like the one you own and so therefore hasn't picked up the rise in mortgage rates that we've seen since the Fed started tightening. Now many Americans of course don't actually face that rise in mortgage rates because unlike in Canada, Americans are able to lock themselves in to a 30-year mortgage rate that can only go down if they choose to refinance and never goes up for the full 30-year term. And the result is that interest payments for anyone who hasn't moved or bought a new house in the last few years have stayed fixed. But many Americans may be frustrated by those high mortgage rates. They would have liked to have moved to a different house, a better house, perhaps a different city, and they're held in their current house because of the fact that should they move, they would face those higher mortgage rates. So high interest rates perhaps are frustrating the home buying desires of Americans. We're seeing that in very low turnover in the existing home market and a pretty sluggish new housing market as well. And that could be part of what we're picking up in terms of disenchantment with the state of the economy, those high interest rates. Financially, of course, Americans have actually been doing quite well. We've had the equity market recently hitting record highs. Home valuations have generally been rising across the US. And so wealth levels have risen quite dramatically in the last few years. But when you do a poll of the population, of course, you're not looking at the average American, you're looking at the full distribution. And we do know that wealth is very unequally distributed and many Americans have not shared in the bounty, particularly those who don't own homes and are renters. In fact, many of those Americans are feeling a bit of a pinch because they've drawn down their savings to finance all the spending they've been doing. They've run up their credit card debts. And we're actually seeing some rise in delinquencies on credit cards and lines of credit, other forms of consumer credit in the US. Many lower income Americans were big recipients of government benefits during the height of the pandemic. Those are programs that have now wound up. There were special tax benefits for families with children and low incomes, for example, that ended. And as well, we had a bit of a moratorium on repayments of college debt, and that has also now come to an end. So again, there's a segment of the U.S. population that is not seeing the benefits they got earlier, and in fact, now making higher payments on credit cards and on student loans that could be filtering into that calculation as to how well they think the economy is doing for them. The result is that we are starting to see actually some signs of a bit of a slowing in American consumer spending. It's a bit too early to call it a trend because we're only talking about two or three months of data after a very strong run in consumer sales, so it could just be a bit of a pause that refreshes before another leg higher. But the last couple of months, for example, of retail sales data are pointing towards a slower pace for consumer spending in the first quarter. Now that's not perhaps something that the Biden administration would want to see in and of itself, because if consumer spending slows, that's really the last bastion of real strength in the US economy. We have weakness in exports, we have a bit of a slowing in business capital spending. And if consumer spending were to slow, that would bring with it a slower economy, not usually what an incumbent president would want to see in an election year. But there could be a bit of a silver lining here. If Larry Summers is right that part of the disenchantment in Americans is the fact that they're facing these high interest rates, then a slowing in consumer spending could be just what the doctor ordered in terms of allowing the Federal Reserve to start cutting interest rates in the second half of the year. And some combination of perhaps more moderate growth and lower interest rates might well not be a negative for the Biden administration in the upcoming election in November. And for financial markets, particularly those in fixed income markets, looking for signs of a slowdown that would pave the way to the lower interest rates that investors have been counting on, that disenchantment of consumers and perhaps starting to show up in consumer spending itself could be, again, something that, at least in the fixed income market, could be a win for investors between now and the end of the year. So we'll be watching that, and we hope that you'll be listening to our future episodes of Eyes on the Economy for further insights into both the US and Canadian economies and for financial markets ahead. Thank you for joining me today.
Outro: Please join us next time on the Eyes on the Economy where we will share our latest perspectives and outlook for the Canadian and US economy.
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