What to Make of the Latest Confidence Index
Consumer confidence was down in May signaling moderate economic growth even as more people get vaccinated and society further reopens. The Conference Board’s consumer confidence index, an important indicator of the economy, fell to 117.2 in May from 117.5 in April.[1] It missed economists’ predictions that it would rise to 118.4, according to a FactSet poll of economists.[2] Consumers’ optimism has lowered about economic growth, the job market, and income prospects. The expectations component that measures consumers’ short-term outlook fell to 99.1 in May from 107.9 for April and well below the pre-pandemic reading of 108.1.
Personal income for April dropped significantly: -13.1% month over month.[3] Consumers expecting a higher income in six months dropped to 14.5% in May from 17.4% in April.[4] It may signal consumers don’t believe that higher wages will stay and/or government stimulus checks, and enhanced unemployment benefits will continue.
Interestingly, manufacturing data showed that while activity had increased due to pent-up demand as COVID-19 restrictions ease, labor shortages and supply chain bottlenecks hampered growth. The disappointing 266,000 rise in non-farm payrolls in April was a sign that labor shortages are becoming a bigger drag on recovery and experts predict May to be slightly better.[5] That may seem hard to understand with the still-elevated unemployment rate of 6.1%, but it would be consistent when you consider that we are still dealing with the pandemic and many people due to health issues or family needs cannot easily get back to work.
The Conference Board also reported there was also a sharp rise in consumers’ inflation expectations. As consumers perceive a higher rise in prices, especially in those essential goods and services that we purchase every day, consumption decisions become more prudent and propensity to save rises.
One debate within the inflation conversation is whether inflationary pressures will be sustained or transitory. Investors fear that sustained inflation could force the Fed to change its policy sooner than expected, though Fed Chair Powell has reiterated that inflationary pressures will be transitory because supply will eventually return to a level that can keep pace with demand.
BlackRock’s investment strategist Gargi Chaudhuri believes that in the medium term, inflation will be driven less by supply chain disruptions and more by rising production costs, the Fed’s new inflation policy that allows it to be higher, and our government’s increasing debt.[6]
How should investors grabble with all this data? Investors’ portfolios should implement a multi-asset approach to hedge against inflation. A diversified approach will help minimize a portfolio’s overall risk. As pandemic restrictions ease and more people get vaccinated, it’s important to note that we and our economy are not out of the woods yet.
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[1] https://www.prnewswire.com/news-releases/consumer-confidence-holds-steady-in-may-301298857.html
[2] https://www.barrons.com/articles/what-the-dip-in-consumer-confidence-means-for-the-economy-51621960777
[3] https://finance.yahoo.com/news/personal-income-declines-april-134201813.html
[4] https://www.nasdaq.com/articles/u.s.-consumer-confidence-holds-steady-housing-showing-strain-as-prices-surge-2021-05-25
[5] Capital Economics. US Economics Weekly, May 28, 2021.
[6] https://markets.businessinsider.com/news/stocks/stock-market-outlook-hedge-higher-inflation-blackrock-commodities-supply-chain-2021-6-1030488895
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