Though you wouldn’t know it from some recent news reports, consumer confidence in the USA is sky high right now, and not just in states that voted for Donald Trump.
Confidence is at its highest point since George W Bush was president and 9/11 hit the nation.
The Conference Board’s US Consumer Confidence Index stood at 111.8 in January, down fractionally on the 113.3 level of December, but a still elevate level nonetheless.
Underlining that point, using a three-month moving average, the index currently sits at 111.5, the highest level since August 2001, according to analysis from ANZ Bank.
It’s good news, helping to fuel the belief in financial markets that better times lie ahead for the economy.
In theory, elevated confidence should help to spur on consumer spending, the largest part of the economy. That in turn should help to boost the economic growth, which in turn should help to strengthen labour market conditions. And, as a consequence, it should lead to an acceleration in inflationary pressures, leading the Federal Reserve to keep on lifting rates.
Many investors have certainly positioned for that to occur since the election of Donald Trump on November 8. Stocks have been hoovered, bonds have sold off.
The reflation trade, despite recent wobbles, has been widely adopted by investors, an outcome you would expect given markets are priced for what will happen in the future rather than the present.
However, what if elevated consumer confidence, and its subsequent financial linkages, actually lead to the Fed hiking less, not more, in the years ahead?
To Daniel Wilson, markets economist at ANZ, the boost in confidence delivered by Trump could prove to be so successful that it will encourage more Americans to return to the workforce given improved employment prospects, helping to slow a two decade-long decline in labour market participation and, as a consequence, keep a lid on inflationary pressures.
Wilson, using data from the US Bureau or Labor Statistics (BLS), says that there are currently 21 million Americans aged between 25 to 54 who are currently not participating in the labour force because they do not want a job “now”.
It’s a lot of potential workers and, if stronger labour market conditions encourage just some of those people to look for work, he says it could have important policy considerations from the Fed.
And he thinks there’s already signs that’s occurring, and he’s got some ripping charts to back it up.
“Recently, the data appears to suggest that more of this cohort may be prepared to re-enter the labour market,” says Wilson, pointing to the chart below showing the number of Americans aged 25 to 34 who are not currently looking for work.
“In 2017, we estimate that every 1 million people that re-join the labour force would boost the participation rate by an estimated 0.4ppt [percentage points],” he says.
“A key policy initiative of the Trump administration will be to attract these people back into the labour force. If we assume 600,000 of these workers re-join this year it would boost the participation rate by 0.2 ppts.”
Along with potentially encouraging more people to look for work who aren’t right now, Wilson says another important part of the population that could boost the participation rate are those who say that they want a job but aren’t looking right now, largely because they are discouraged about their prospects for finding work.
And, although smaller in number than those who don’t want a job right now, if the recent lift in consumer confidence is sustained, it suggests that it may encourage many of these people back into the labour market, says Wilson.
“If confidence levels are maintained, the historical relationship suggests that more people will return to the labour market,” Wilson says, pointing to the chart below.
“The correlation is over 0.8 with confidence leading by 12-24 months.”
Essentially, if confidence improves, it tends to attract these potential workers back to the labour market.
“The number of discouraged workers has declined steadily since the GFC, more than halving,” says Wilson. “It currently sits at 532,000 workers, compared to the pre-crisis average of around 380,000.
So past statistical relationships and recent trends both point to the prospect of more people of working age rejoining the labour force in the period ahead. If that does eventuate, Wilson says it could lead to a slower rate hiking sequence than what the Fed and others currently anticipate.
“This has important policy implications, because it suggests that the labour market is likely to remain close to (or at) full employment, barring any shocks, but that wage inflation pressures may not intensify dramatically given the offsetting impacts of higher confidence adding workers,” says Wilson.
“In an upside scenario, the implication is that the labour market may not exert strong upward pressure on core inflation in 2017. That implies that the Fed can continue with its gradual approach to raising interest rates this year.”
ANZ’s base case is for two 25 basis point hikes from the Fed in 2017, in June and December respectively. That’s in line with market expectations, but lower than the pace expected by the Fed and other forecasters.
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