Consumers Are Starting to Act As If Recession Is Right Around the Corner

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About the author: Dana M. Peterson is chief economist at The Conference Board.

Consumers sense a recession is right around the corner and are starting to behave like it. They are becoming unhappier by the minute and are pinching pennies at the cash register. Most individuals are working, have some savings, and are even receiving wage hikes. But squeezed by higher inflation and rising interest rates, they are curbing spending. 

Consumer confidence is showing deepening cracks, according to The Conference Board’s Consumer Confidence Index. The gauge slipped for a second consecutive month in November, spurred by declining perceptions of both the present situation and expectations for the coming six months. Consumers’ views of current business conditions and employment are softening. That is notable because they have had a largely favorable outlook this year, likely because most adult Americans have been working and enjoying rising wages. But stock market volatility, tech sector layoffs, and inflation have made them less sanguine. A troubled economy and falling stock prices are bad news for business and job security.

Meanwhile, the survey’s expectations index continues to signal a recession ahead. A reading below 80 usually indicates that consumers anticipate a recession within the next half-year, and it has been in that territory for nine consecutive months. So, the gauge—which is usually right—points to a recession starting now or in early 2023.

Sagging expectations reflect souring views of future business and employment conditions as well as personal finances. Examples abound.      

The Consumer Confidence index shows that one-year inflation expectations (at 7.2% in November) remain well above the 2019 average of 4.6%. Such beliefs are a negative omen for future personal finances and spending intentions.

Meanwhile, consumers’ spending plans heading into the holiday season are flagging. The Conference Board’s annual holiday-spending survey revealed that households intend to spend less on gift items and more on nongift items like food due to inflation. Consumers do say they will head back to the malls, purchasing fewer items online, which might cause a spending bump on in-person services. But looking ahead, the appetite for goods like cars, furniture, and appliances is fading.

Consumers have also soured on home buying as mortgage rates surge and home prices remain materially higher than before Covid. That is forcing many, especially younger and first-time buyers, back into a frothy rental market, temporarily frustrating efforts to temper elevated housing costs. 

Cooling the housing market is necessary for calming domestic demand and reining in inflation. Less new-home construction and fewer existing home sales transactions directly reduce gross domestic product growth. Moreover, lower home prices reduce wealth, which also affects consumption growth. As such spending ebbs, businesses cut prices to compensate, supporting the Fed’s inflation-reduction goals.

The growing consumer dissatisfaction in recent months is apparent across age and income groups as well as tax brackets. This is many young Americans’ first real experience with inflation, while older ones are remembering just how distressing it can be. Sentiment is worst among households earning less than $50,000 a year—typically the most sensitive to price increases and least able to absorb income shocks like job losses.

Consumers are acting on their feelings, a trend that will only accelerate the bad news. The malaise is apparent in housing data: Housing spending is down more than 16% over the first three quarters of 2022. Housing starts dipped from a 16-year high of 1.8 million in April to 1.4 million in October. Existing home sales plunged from 6.49 million in January to 4.43 million in October. 

Meanwhile, consumer spending away from housing is also waning. Demand for goods is understandably lessening as households shift back to spending on in-person services with the pandemic largely in the rear-view mirror. But higher prices for necessities (like food, energy, and shelter), rising financing costs, and fewer home sales are also reducing demand for durables. 

Real services spending has returned to the prepandemic trend, but performance varies by category and is subject to future finances. Consumers are spending more on select experiences like restaurants and travel. But real spending on other forms of recreation and entertainment (such as sporting events, movies, and museums), health care services, personal care, and motor vehicle services are still struggling to return to prepandemic levels. Some of these laggards are highly discretionary or have cheaper substitutes like streaming services or public transportation.

Federal Reserve officials have warned that curbing inflation will involve short-term pain. Elevated inflation erodes incomes for all households and can become embedded in the psyches of consumers, causing bigger challenges for the economy down the road. Reduced consumer demand is part of the Fed’s plan for inflation, but it will be a bitter pill for American households to swallow.

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