Market Memo
August 2024 – By Daniel Zalipski CFA®
F. Scott Fitzgerald once stated, “The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function.” The phenomenon he is describing, simultaneously holding two or more contradictory beliefs, is known as cognitive dissonance. It is more commonly associated within the field of psychology, but the concept is catching the attention of investors struggling to make sense of an increasingly complex landscape as two dissonant economic reports continue to report contradictory and perplexing results.
The monthly consumer sentiment survey is a subjective measurement of the economy from the University of Michigan. With a track record stretching back to 1952, the survey samples U.S. consumers and asks them a series of questions to gauge how they feel about their own personal situation and the broader economy a year ago, today, and over the next several years. The survey provides a way for economists and investors to gauge how the average consumer is feeling, and how those feelings may translate to more or less consumption.
In August, the consumer sentiment report snapped a 5-month drag, improving at a time of heightened concerns regarding the broader economy’s path. Despite inching higher last month, the level of consumer sentiment remains historically below-average. Looking back through 1952, consumer sentiment has been higher 87% of the time compared to today’s level. The cause of this depressed sentiment is no mystery. Consumers have been contending with inflation, especially at the grocery store, after decades of subdued price increases. It will take time for attitudes to adjust even as inflation subsides, and the situation improves. The bottom line is consumers simply don’t feel great about the economy.
A more objective measure of the economy is the dreary-named Misery Index. The Misery Index is a measure of how the average American consumer is faring, and it is calculated by simply adding the inflation rate and unemployment rate together. The index is simple to understand, high inflation and high unemployment sound quite miserable, especially at the same time. One would think if sentiment were low, misery must be high, but that is not the case today. Using data that goes back to 1948, the Misery Index has been higher 68% of the time compared to today’s level.
There certainly seems to be a disconnect to how the American consumer perceives the current economy. Sentiment remains low but some objective measures suggest otherwise. Actions, as they say, speak louder than words (or surveys). For consumers who feel down about the situation, they certainly do not act like it. The Personal Savings Rate, the percentage of disposable income retained for savings, is trending at 3.4%, far below this historical average of 8.6%.
They are not just saving less, but spending more, even after accounting for inflation. Retail sales for the month of July were far above expectations (+1.0% vs +0.3% estimate), as consumers continue to spend on goods like automobiles, electronics, and appliances. These are categories that are especially sensitive to economic turmoil, and not indicative of an overly cautious consumer on the brink of collapse.
Cognitive dissonance aside, despite the opposing dichotomy of these recent economic reports, the broad economy retains its ability to function. The American consumer marches on.
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