As the economy continues to suffer from high inflation, we see a paradox emerging. Individuals and businesses report feeling bad about the economy, but they are still spending and making new investments. We call this divide between how consumers say they feel about the economy (bad) and how they’re acting (still spending) second-hand pessimism.
Usually, when consumers feel badly about the economy, they pull back on spending. But in the latest data from August, total spending rose more than inflation, and in September, retail sales – spending on goods at physical and online stores, bars, and restaurants – grew at the same pace as our stubbornly high inflation, which remains near a 40-year high at 8.2%.
Bucking historic trends, consumers are currently keeping pace with inflation, not cutting back as would be expected when they feel dreadful about the economy.
What Businesses Are Saying: A similar situation holds true for businesses. Businesses of all sizes, sectors, and industries report feeling pessimistic about the future of the economy, yet they continue to hire, raise wages and make new investments, and they expect to continue doing so.
Despite two consecutive declines in quarterly gross domestic product in the first half of 2022, business conditions appear impressively resilient when looking ahead, according to the Q3 RSM and U.S. Chamber Middle Market Index. While 48% percent of the middle market executives surveyed said gross revenues increased in the current quarter, 60% stated they expect them to improve over the next six months. Half also stated net earnings improved in the third quarter, with 59% indicating they expect improvement in the near term.
When looking at small businesses, we see similar trends. In the third quarter of 2022, small businesses said the U.S. economy is in somewhat or very poor health, up 10 percentage points from last quarter, according to the Q3 MetLife and U.S. Chamber Small Business Index. The number of small business owners and decision makers saying the economy is in poor health is now more than twice as much as those saying it’s in good health. However, small businesses generally report positive sentiment about the overall health of their businesses, contributing to secondhand pessimism.
According to the Conference Board’s Survey of CEO Confidence:
These numbers run counter to the notion that businesses are pessimistic about the economy, even though that’s what they are reporting. These aren’t the actions analysts would expect from businesses preparing for a recession.
What it means: This doesn’t mean the economy is going gangbusters by any means, or that there aren’t significant risks on the immediate horizon. The economy is doing alright given all the headwinds it faces right now, such as high inflation and workforce shortages. While it may grow between 1% and 2% in the second half of this year, the chances of a recession in 2023 are still significantly elevated because of high inflation and the rising interest rates that are necessary to bring it down.
Looking at these factors, businesses and consumers are right to convey at least some pessimism.
However, consumers’ individual ability to keep spending, driven by a strong labor market and high savings levels, and businesses’ willingness to continue hiring, raising wages, and investing means the U.S. could weather the coming economic slowdown better than previous downturns.
Whether that keeps us out of a recession altogether – or makes a recession much less painful should it occur – remains to be seen. Either way, it means the potential economic slowdown may not be as bad as many fear it could be.
Bottom Line: Inflation remains the biggest problem for the economy, but even as prices remain high, consumers are still spending. Economic fortunes can change quickly, which means consumers could stop spending at strong levels, and businesses could change their hiring and investment plans to match their low levels of optimism. But for now, it’s a good sign that the pessimism is second-hand where it can cause much less trouble.
Find more economic data insights from the U.S. Chamber here.