There is a growing gap between sentiment and reality. Investors would be wise to focus on what consumers do, not what they say
. In June, with unemployment at 3.6%, wages growing by 7% in the past year and bank balances more than 50% higher than they were three years before, the consumer-sentiment index nonetheless sank to its record low—lower than during the oil shocks of the 1970s, after the terrorist attacks of September 11th, in the depths of the Great Recession and at the height of the covid-19 pandemic.
Inflation is largely to blame. For decades, core inflation has been kept below 5% and consumer sentiment has been driven largely by unemployment. Today, although Americans are cheerier than they were a few months ago, high prices continue to weigh on consumer morale, though not by enough to affect actual spending: expenditure is growing by 1.8% year on year.
Given the gap between sentiment and behaviour, investors would be wise to focus on what consumers do, not what they say. Although the American economy is facing serious headwinds—including high inflation, a volatile stockmarket and painful interest-rate rises—the labour market is strong. Americans resent paying higher prices. But recent history suggests that, as long as they have jobs and money in their pockets, they will continue to do so.
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