This month, US households delivered successive damning indictments of the US economy.
Both the University of Michigan sentiment report and the Conference Board confidence survey betrayed a state of dejection that was remarkable even in the context of a perennially dour national mood.
Americans haven’t been happy since… well, probably since the 1990s if we’re honest, but sticking with the two marquee measures of a consumer attitudes, since the pandemic.
The simple figure above’s updated with the latest headline prints from the Michigan and Conference Board surveys. Repetitive as this’ll invariably sound, it’s important we don’t become desensitized: These aren’t just poor readings, they’re God awful.
Importantly — and I alluded to this above — November’s releases stood out even as “vibecession”-era sentiment checks go. The expectations index in the Conference Board survey printed among its worst readings since the GFC, and the current conditions gauge in the Michigan survey showed a record low, bar none.
With all of that in mind, have a look at the figure below, from BMO’s US rates team. It shows the z-score for the forward-looking metrics in both surveys.
With this month’s drop, the Michigan expectations gauge is more than two standard deviations below its long-term average and the Conference Board’s forward-looking index is just barely better. It’s exceedingly rare for both of those metrics to be this far below “normal” simultaneously.
“Though not quite reaching the threshold of an ‘outlier,’ consumers’ economic expectations [have] taken a meaningful leg lower,” BMO’s Ian Lyngen remarked. “Combined with the cooling in employment conditions and softer pace of spending, the mounting signs of strain [are] increasingly concerning given that consumption has long been a pillar of the economic expansion.”
In the latest national polling, Donald Trump was underwater on the economy by 14ppt, and it’s fair to suggest most of that underperformance is attributable to the perception that he isn’t doing enough (or anything) to lower prices.
The figure above plots every major, national reading on single-issue inflation polling since Trump was inaugurated for the second time in January. In the latest poll, conducted just before Thanksgiving, his net approval on the issue was negative 36ppt, among the worst yet.
The CBS/YouGov survey found that 60% of Americans said Trump “describes things with prices as better than they really are.” Two-thirds said his policies are increasing the cost of groceries.
Notably, 40% of Republicans polled said Trump’s not telling it like it is when it comes to inflation.
Crude is under $60 a barrel. People I talk to don’t even notice it at the gas pump, exasperation has set in,. Any kind of oil shock and truly we would be the 70s again. I don’t think that would be great again.
The problem is that prices reset higher across the economy by ~20%-40% post-pandemic. So, regardless of what happens now — i.e., even if prices were to fall economy-wide by, say, 5%, which isn’t going to happen, but let’s pretend — average people are still going to say “inflation is a problem” because for them inflation = prices, not price growth.
Turns out that running a $2T deficit, year after year, causes inflation- no matter what else you do to try to circumvent the problem.
Shocker.
If deficits are the problem, why are we seeing inflation in the last few years and not the previous decade when deficits were almost as high?
The long term average deficit, as a percentage of GDP, is about 3.3%. Starting in 2019 through 2024; annual deficits, as a percent of GDP, were 4.6%, 14.7%, 11.7%, 5.3%, 6.1%, 6.2%.
Since we aren’t likely going to cut spending, we need to raise taxes IF we want to curb inflation.
This isn’t as simple as you tend to present it. These aren’t natural laws. This isn’t like, “If you want that plant to grow, you need to give it more sunshine.”
In other words, there’s some causation, but it’s not unequivocal.
Here in Hong Kong, we have the opposite problem (benefit?) The prices in Mainland China are falling so much that Hong Kongers are flocking across the border to dine and shop, which has been really hurting the local Hong Kong economy. Lots of restaurants and shopping centers are going under. Hong Kong has gone from being expensive relative to the USA to being cheap. It’s a lot less expensive for groceries and dining out here than back home in the USA!
Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair.
“Notably, 40% of Republicans polled said Trump’s not telling it like it is when it comes to inflation.”
Only 40% of Republicans will believe their own eyes.
I guess that’s better than 30%.
NYT had a funny article about the different ways Bessent has tried to downplay inflation.
In 2024, he told clients that tariffs were inflationary but they wouldn’t be used much.
After becoming Treasury Secretary, he has variously said that
– Reshoring production via tariffs is Americans’ patriotic duty
– Prices are not rising because inflation is in services, not in goods
– Tariffs will cause only a one-time price adjustment
– Like “melting ice cubes”, tariffs will only be temporary until production is reshored, then will be removed
– Inexpensive goods are not part of the American Dream
It is amusing to watch him say everything but the truth, which is that tariffs have not yet driven a large broad price increase because large corporates have ways to slow or reduce their impact via front-loading, squeezing suppliers, and cutting employees, while taking revenue from small companies without similar levers, and ultimately sacrificing margin as demand destruction gathers force, while high tariffs are permanent even if individual tariffs are so inconstant as to slow or stall reshoring.