Consumer Spending Growth Expectations Spike, while Inflation Expectations Edge Back Up

March 14, 2022

NEW YORK—The Federal Reserve Bank of New York’s Center for Microeconomic Data today released the February 2022 Survey of Consumer Expectations, which shows an increase in short-and medium-term inflation expectations, reversing some of last month’s sharp declines. Median home price expectations, on the other hand, declined. Year-ahead earnings growth expectations remained unchanged, while expectations about unemployment, perceived job loss, and job finding expectations all improved. Spending growth expectations for the year ahead reached a new series high. Expectations about future credit access deteriorated noticeably.

The main findings from the February 2022 Survey are:

Inflation

  • Median one-year-ahead inflation expectations increased to 6.0% in February from 5.8% in January, matching its November 2021 series’ high. The increase was widespread across age, education, and income groups, but largest for the respondents without a high school degree. After a sharp decline in January, median three-year ahead inflation expectations ticked up by 0.3 percentage point to 3.8%, while remaining below its November and December 2021 levels of 4.2% and 4.0%, respectively. The survey’s measures of disagreement across respondents (the difference between the 75th and 25th percentiles of inflation expectations) remained unchanged at both horizons and well above their pre-pandemic readings.
  • Median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes—decreased slightly at the one-year horizon and increased at the three-year horizon. Both measures remain elevated relative to their pre-pandemic levels.
  • Median year-ahead home price change expectations decreased to 5.7% from 6.0%. The decline was most pronounced for respondents without a college education.
  • All the commodity price change expectations the survey elicited increased in February. Median expectations about year-ahead price changes for food and gas increased by 3.3 and 1.5 percentage points to 9.2% and 8.8%, respectively. The median year-ahead expected change in the costs of medical care and college education increased to 9.6% and 9.0%, from 9.5% and 7.3%, respectively. The median expected one-year-ahead change in the price of rent increased to 10.1%, from 9.8%.

Labor Market

  • Median one-year-ahead expected earnings growth was unchanged for the second consecutive month at 3.0% in February and remains above its 12-month trailing average of 2.6%.
  • Mean unemployment expectations—or the mean probability that the U.S. unemployment rate will be higher one year from now—decreased to 34.4% from 35.9%. The decline was broad-based across age, education, and income groups.
  • The mean perceived probability of losing one’s job in the next 12 months declined by 0.8 percentage point to 10.8%, reaching a new series low. The mean probability of leaving one’s job voluntarily in the next 12 months also decreased to 18.9% from 19.3%.
  • The mean perceived probability of finding a job (if one’s current job was lost) increased to 56.5% from 55.7%, remaining above its trailing 12-month average of 54.0%. The increase was driven by respondents without a high school degree.

Household Finance

  • The median expected growth in household income fell by 0.1 percentage point to 3.2% in February, but remains above its trailing 12-month average of 3.0%.
  • Median year-ahead household spending growth expectations increased sharply to 6.4% from 5.5% in January, reaching a new series high since the start of the series in June 2013. The increase was broad-based across age, income, and education groups.
  • Expectations about future credit availability deteriorated considerably, with more respondents expecting it will be harder and substantially fewer respondents expecting it will be easier to obtain credit in the year ahead. Perceptions of credit access compared to a year ago also deteriorated, with more (fewer) respondents finding it harder (easier) to obtain credit now than a year ago.
  • The average perceived probability of missing a minimum debt payment over the next three months decreased by 0.8 percentage point to 9.2%, a new series low.
  • The median expectation regarding a year-ahead change in taxes (at current income level) increased slightly to 4.5% from 4.4%.
  • Median year-ahead expected growth in government debt remained unchanged at 11.1%.
  • The mean perceived probability that the average interest rate on saving accounts will be higher 12 months from now increased to 31.3% from 30.5% its highest level since May 2019.
  • Perceptions about households’ current financial situations compared to a year ago deteriorated slightly, with more (fewer) respondents reporting being financially worse (better) off than they were a year ago. Respondents were mixed about their household’s financial situation in the year ahead, with a larger share of respondents expecting their financial situation to deteriorate and also a larger share of respondents expecting their financial situation to improve a year from now.
  • The mean perceived probability that U.S. stock prices will be higher 12 months from now decreased by 1.5 percentage points to 37.0%. This is the lowest reading of the series since June 2013.

About the Survey of Consumer Expectations

The Survey of Consumer Expectations (SCE) contains information about how consumers expect overall inflation and prices for food, gas, housing, and education to behave. It also provides insight into Americans’ views about job prospects and earnings growth and their expectations about future spending and access to credit. The SCE also provides measures of uncertainty regarding consumers’ outlooks. Expectations are also available by age, geography, income, education, and numeracy. 

The SCE is a nationally representative, internet-based survey of a rotating panel of approximately 1,300 household heads. Respondents participate in the panel for up to 12 months, with a roughly equal number rotating in and out of the panel each month. Unlike comparable surveys based on repeated cross-sections with a different set of respondents in each wave, this panel allows the survey to report the changes in expectations and behavior of the same individuals over time. For further information on the SCE, please refer to an overview of the survey methodology here, the interactive chart guide, and the survey questionnaire.

Contact
Mariah Measey
(347) 978-3071
Mariah.Measey@ny.frb.org 

Source: Federal Reserve Bank of New York

Consumers’ Spending Expectations Rise Despite Flat Income and Earning Expectations

Source: Federal Reserve Bank of New York

PRESS RELEASE

NEW YORK—The Federal Reserve Bank of New York’s Center for Microeconomic Data released the November 2020 Survey of Consumer Expectations, which shows that despite flat income and earnings growth expectations, households’ year-ahead spending growth expectations rose sharply in November to 3.7%, the highest level recorded in more than 4 years. Labor expectations were mixed with deteriorating expectations about the unemployment rate and improving expectations about job security. After returning to their pre-COVID-19 levels in recent months, home price expectations recorded their first decline since April 2020. Median inflation expectations increased at both the short and medium-term horizons, while uncertainty and disagreement about future inflation remain elevated.

The main findings from the November 2020 Survey are:

Inflation

  • Median inflation expectations increased 0.2 percentage point in November to 3.0% at the one-year horizon and increased 0.1 percentage point to 2.8% at the three-year horizon. The increase in the short-term measure was driven mostly by respondents who are younger (below the age of 60), more educated (bachelor’s degree or higher) and with higher household income (over $100,000). Our measures of disagreement across respondents (the difference between the 75th and 25th percentile of inflation expectations) remain substantially above their pre-COVID-19 level at both horizons.
  • Median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes— remained unchanged at the short-term horizon and increased at the medium-term horizon. Both measures are elevated relative to pre-COVID-19 readings.
  • Median year-ahead home price change expectations decreased 0.1 percentage point to 3.0% in November. This is the first monthly decline in the series since April 2020 when it reached its lowest level of 0%. The decline was recorded in all Census regions except the Northeast.
  • The median one-year ahead expected change in the cost of a college education and in the price of gasoline both increased by 0.3 percentage points to 5.2%. In contrast, the median expected change in the cost of medical care declined sharply, from 9.1% to 7.1%, slightly below its 2019 average of 7.2%. Expected changes in food prices and in the cost of rent declined by 0.1 and 0.2 percentage point to 5.1% and 5.5%, respectively.

                     
Labor Market

  • Median one-year ahead expected earnings growth remained flat in November at 2.0%, below its 2019 average level of 2.3%. This is the fifth consecutive month that the series has remained unchanged.
  • Mean unemployment expectations—or the mean probability that the U.S. unemployment rate will be higher one year from now—increased for the first time since July 2020, from 35.4% in October to 40.1% in November.
  • The mean perceived probability of losing one’s job in the next 12 months decreased for the third consecutive month from 15.5% in October to 14.6% in November, still slightly above its 2019 average of 14.3%. The decrease was more pronounced among respondents above the age of 60 and without a college education. The mean probability of leaving one’s job voluntarily in the next 12 months decreased by 1.3 percentage point to 16.6% in November, a new series low. The decrease was driven mostly by respondents above the age of 60.
  • The mean perceived probability of finding a job (if one’s current job was lost) increased from 46.9% in October to 47.9% in November, but remains substantially below its 2019 average of 59.8%.

Household Finance

  • The median expected household income growth stayed flat in November at 2.1%, well below its 2019 average of 2.8%.
  • Median household spending growth expectations rebounded sharply in November, increasing 0.6 percentage points to 3.7%, its highest level since July 2016. The increase was driven mostly by those with household incomes below $50,000.
  • Perceptions of credit access compared to a year ago remained essentially unchanged in November. In contrast, expectations for future credit availability improved, with more respondents expecting it will be easier to obtain credit in the year ahead.
  • The average perceived probability of missing a minimum debt payment over the next three months increased by 1.6 percentage points to 10.9% in November, still below its 2019 average of 11.5%.
  • The median expectation regarding a year-ahead change in taxes (at current income level) increased sharply in November from 2.9% to 4.1%, the highest reading since May 2014. The increase was more pronounced for respondents between the age of 40 and 60.
  • The mean perceived probability that the average interest rate on saving accounts will be higher 12 months from now increased 0.5 percentage point to 24.8% in November, remaining below its 2019 average of 30.0%.
  • Perceptions about households’ current financial situations compared to a year ago remained essentially unchanged in November. In contrast, respondents were more pessimistic about their households’ financial situations in the year ahead, with more respondents expecting their financial situation to deteriorate, and fewer respondent expecting an improvement in their financial situation.
  • The mean perceived probability that U.S. stock prices will be higher 12 months from now decreased 2.3 percentage points to 38.5% in November, its lowest level since August 2019.

About the Survey of Consumer Expectations (SCE)
The SCE contains information about how consumers expect overall inflation and prices for food, gas, housing, and education to behave. It also provides insight into Americans’ views about job prospects and earnings growth and their expectations about future spending and access to credit. The SCE also provides measures of uncertainty regarding consumers’ outlooks. Expectations are also available by age, geography, income, education, and numeracy. 

The SCE is a nationally representative, internet-based survey of a rotating panel of approximately 1,300 household heads. Respondents participate in the panel for up to 12 months, with a roughly equal number rotating in and out of the panel each month. Unlike comparable surveys based on repeated cross-sections with a different set of respondents in each wave, our panel allows us to observe the changes in expectations and behavior of the same individuals over time.

Contact
Shelley Pitterson
(212) 720-2552
shelley.pitterson@ny.frb.org

Public policy should encourage banking to go back to its roots: financing commerce while supporting high yield…

The unbanked are unbanked because they have nothing to bank.  In a nation driven by capital formation and returns on capital, focusing on the unbanked seems like putting the horse before the carrot.  The American Treasury Department and the central bank should be focusing public policy on encouraging capital formation and generating high yield.  Nothing in the U.S. Constitution says that consumers should be encouraged to borrow or that banks should be obliged to lend to the consumer class.

Political responses such as the Community Reinvestment Act, the Dodd-Frank Act, or the creation of the Consumer Financial Protection Board cater to voters but overlook the need for encouraging the accumulation of capital goods necessary for driving the American economy.

More importantly, political responses mentioned above serve to incentivize consumers to enslave themselves to credit even while the last four decades have seen real wages go stagnant.  The political class on the left is quick to leave out consumers’ complicity in the financial downturn of 2007-2009 where consumers were encouraged to borrow against their shrinking means to repay.  Consumers do not need protection from banks.  We need our mindsets redirected in our approach to banking.

Each household needs to rebuild their capital buffer.  It is easier said than done especially in a transition period where the timeline for capital’s replacement of labor with automation and artificial intelligence is being sped up.  Not only is more work being done from home but businesses are determining whether the benefits of keeping employees at home outweigh the costs of bringing them back in-house.  A number of employers have been transparent with updating employees on their engagement with companies offering AI-driven resources that increase efficiency.  Larger companies are partnering with technology companies whose mission is to reduce the time employees spend on certain tasks.  These are threats to labor and income and in this environment not only is the consumer tasked with increasing household capital formation but with seeking additional or alternative opportunities that provide for increases in income, savings, and investment.

One way, in my opinion, to increase capital while deriving additional income is for public policy to encourage high yield on capital.  The consumer who flips her mindset from shopper to investor needs an environment where her savings can accumulate at a faster rate; where higher residuals can be reinvested into her principal holdings and create appreciation.  Public policy should support full employment of capital and maximum prices for capital. How does the US get there?

One way to get there is for banks to abandon their risk-based interest rate pricing model, where higher interest rates is the price that riskier customers must pay for borrowed funds.  Rather, banks should abandon consumer lending altogether.  Lending money to a consumer in a stagnant income, labor replaced by automation environment so that the consumer can build a deck, finish a basement, or send a kid to school is what I call low value enterprise lending where the loan is being applied to a consumer’s wage income versus residuals the asset provides.

Instead, interest rates should reflect the competition between borrowers seeking to demonstrate their enterprise ideas will provide the greatest returns to capital and equity.  High interest rates should not be charged because of a high risk of failure.  Rather, high rates should be charged because where the lender sees high returns to equity in the enterprise, the lender seeks to capture some of that value.

Banks, then, should abandon consumer lending and put energy and resources into commercial or merchant banking.  Consumer involvement in banking should be limited to establishing savings or investment accounts with banks or owning stocks in banks.

Again, the upside from this model for banks, a focus on lending to merchants that leverage real assets to make income.  The upside for the consumer is less borrowing and more investing thus greater capital formation.  Also, the consumer may learn how to plan purchases over a long term versus seeking the psychic value of getting something now and paying for it later.  For example, a consumer may put away cash over some determined period of time to purchase that new deck without having to burden themselves with debt.

Or, a consumer may seek out a group of private consumer lenders who are not connected to the banking system thus reducing the chances of shock to the system should a borrower renege on a loan.  They will be forced to rely on the courts, lawyers, and mediators for resolving any conflicts with private lenders.