The Fed may have achieved a soft landing, but pessimistic shoppers—especially Gen X and Millennials—remain a stiff headwind for consumer-facing companies.
All those 2023 predictions about a recession hitting the U.S. in 2024 have been wrong—so far, anyway. Instead, headlines have touted the apparent success of the Federal Reserve in engineering a slowdown in the rate of inflation without stifling the economy. Hooray for the Fed.
But that hopeful news—and the constant drumbeat of election developments—seems to have drowned out another important, yet more sobering, trend: Consumers as a group are worn out by inflation and all the other financial disruptions triggered by the COVID pandemic.
Although the rate of inflation has fallen back to levels close to those pre-pandemic, the prices of goods have not decreased. Housing remains unaffordable for many, and car insurance rates are higher than ever. Whether or not this year’s retail holiday season performs well, American shoppers are fundamentally discouraged about the future.
The most recent Consumer Confidence Survey by The Conference Board, a nonprofit think tank, recorded a broad decline in its monthly index for September. “Consumer confidence dropped to near the bottom of the narrow range that has prevailed over the past two years,” according to Chief Economist Dana M. Peterson.
The decline was the largest since August 2021, with all components of the index in retreat. Peterson noted that consumers’ assessments of current business conditions have turned negative; views of the labor market have softened; and people are more pessimistic about future labor market conditions as well as future income.
Among generations, the 35–54 age group (straddling Gen X and Millennials and representing about a third of the U.S. population) were the least confident. The Conference Board survey found confidence declined across most income groups.
Similarly, the widely-cited University of Michigan’s most recent Consumer Sentiment Survey found that although inflation expectations have fallen substantially since 2022, the percentage of consumers blaming high prices for their worse personal finances remains at or near an all-time high.
Presidential election years tend to produce a lot of anxiety and uncertainty, and this year is no different. But do elections actually affect the consumer economy?
A long-term University of Florida study released earlier this year found that they can, depending on who wins. A recent Nationwide Insurance Institute survey found that investors are “bracing for adverse outcomes if their preferred candidates fail to win.” Those investors expect a recession within 12 months.
The case for a 2025 recession grows stronger when examining the huge run-up in the stock market (the S&P 500 stock index is 150% higher than it was in March 2020) and the sky-high prices of homes (on average up about 50%).
These asset prices have driven up the net worth of many households, giving those consumers the confidence to keep spending. History teaches that such above-average returns are unsustainable. When those asset bubbles start to deflate, the impact on consumer spending will be swift.
Financial industry chatter about how great things will be now that the Fed has started cutting interest rates is geared toward investors rather than everyday consumers. But history offers another lesson on rate cuts: In nearly every case over recent decades, a few months after the Fed begins cutting rates to fight inflation, a recession ensues.
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