Consumers remain confident amid growing inflation and recession risks

The Conference Board’s measure of consumer confidence rose to 108.0 in September, topping the consensus forecast for 104.5. The increase was the first for the index following three straight monthly declines. The degree of strength in the index, which remains well above the index’s long-term average of about 95.0, may seem surprising against a backdrop defined by uncertainty on multiple fronts.

Of the two components, the Present Situation index, which reflects consumers’ assessment of the current state of the economy, improved to 145.4. Looking ahead, consumers are still much more restrained in their expectations for the economy in the coming months. The outlook for business conditions, labor market conditions, and household financial prospects remain relatively gloomy, although there were signs of modest improvement across all three.

Consumers are certainly aware of the deterioration in economic conditions; more survey respondents viewed current business conditions as bad versus good. To understand why the index suggests that consumers appear to be relatively confident as inflation erodes their spending power and recession risks appear to be growing, you have to understand the focus of the survey.

The key to the upbeat assessment lies firmly in the resiliency of labor markets to this point despite the sharp slowdown in the economy this year. Unemployment remains near 50-year lows and jobs remain readily available across the country. Nearly half of consumers surveyed indicated that they believed jobs were plentiful — about four times the number who believe that employment is hard to find. Given the survey’s heavy jobs focus, it’s understandable that the consumer mood would appear relatively upbeat. That stands in sharp contrast to other measures of the consumer mood that are focused on household income and their personal financial circumstances, which reflect a greater degree of pessimism.

With the Fed continuing to aggressively hike rates and financial conditions tightening, recession risk has risen, and with them, the likelihood of a more significant deterioration in labor conditions yet to come. The Fed won’t directly state that they intend to tighten the U.S. economy into a recession, and undoubtedly, they would prefer not to do so if they could knock inflation down to 2% without a contraction. However, the probability that policymakers are able to do so without tipping the economy into negative territory appears to be increasingly low, even as the Fed recommits itself to beating inflation, potentially resulting in near-term pain for the economy.

If that’s the eventual result, as many economists are now forecasting, consumer confidence is almost certain to fall as layoffs pick up and joblessness rises.

All of this suggests that the modest September uptick in consider confidence has to be viewed through an appropriate lens. Labor market conditions remain one of the few bright spots in an economy trying to push ahead against high inflation, rising interest rates, and geopolitical uncertainties that threaten the global outlook. If labor conditions weaken from here, as they are expected to, rising confidence will be short-lived.

The bottom line? Things aren’t as rosy for the average American household as the consumer confidence index would suggest. Plentiful jobs are a strong underpinning that have benefited American workers, but labor conditions are a lagging indicator — one that’s likely to soften, perhaps considerably — in the coming months.