Consumers wary of spending in uncertain economy – Forbes Advisor

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Recent economic news was encouraging as inflation came in lower than expected in November and the US Federal Reserve slowed the pace of rate hikes. Nonetheless, consumers are worried about the economic situation.

The latest Forbes Advisor-Ipsos Consumer Confidence Biweekly Tracker shows a sharp drop in overall consumer confidence. Calculated on a 100-point scale, the index rose above the 50-point mark for the first time in two months at the end of November, but has now fallen to 48.7.

Conducted by Ipsos, the survey measures consumer sentiment over time.

“By the end of 2022, Americans are feeling worse about their financial health, job security, purchasing confidence and future expectations than they did when the year began,” said James Diamond, senior research manager at Ipsos.

This sentiment is reflected in the number of people who say they save less money and feel uncomfortable making larger or different household purchases.

Uncertainty about economics can delay spending

The reason for the recent drop in consumer confidence is unclear. While previous research has shown that consumer sentiment often rises before an election and falls after it, that does not appear to be the case here.

Instead, it may simply reflect the current economic environment, where inflation is high compared to recent years and interest rates continue to rise. Certainly, many households are rethinking their spending.

According to the survey, buying confidence has dipped slightly compared to two weeks ago, and two-thirds of respondents said they feel less comfortable making larger and household purchases now than they did six months ago. Those low confidence levels that haven’t been seen since early 2021.

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Overall, the Expected Outlook – which shows how people see the future of their personal finances – is 56.2 on a 100-point scale. That’s 2.8 fewer than two weeks ago and seven points below the pandemic average.

Almost half of Americans save less

The economy is sending mixed signals about whether the country will slide into recession next year — and if so, how bad that downturn could be.

Although a separate Ipsos survey on economic trends in 2023 found that more than 70% of people worldwide expect inflation, price increases and interest rate hikes in 2023 to exceed 2022 experiences, Americans are not necessarily bolstering their financial reserves, to prepare for the worst-case scenario.

Among respondents to the Forbes Advisor Ipsos survey, 45% said they are saving or investing less money than usual. In addition, a quarter said they spend more than usual and 28% withdraw more than usual.

These trends are not surprising given this year’s rate of inflation, but they are worrying. Without adequate cash reserves, some families could struggle to make ends meet if the economy falters in 2023 and their income is hit.

Read more: How the pandemic shook the rule of thumb for emergency savings

Fortunately, the rate of inflation appears to be slowing, and that could ease the economic pressure on families, allowing them to divert more money to their savings. The Bureau of Labor Statistics put annual inflation at 7.1% in November, the lowest percentage this year, the government agency said.

Other organizations estimate the inflation rate to be even lower. The real-time inflation index from Truflation, an independent inflation data aggregator, puts the annualized rate at just under 6% on December 14th. “Furthermore, our number has dropped to 7.4% from 6.5% on December 1st. Late October,” said Oliver Rust, head of product at Trflation, in a statement.

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The core inflation rate is 6% year-on-year. Core inflation strips out the food and energy categories, which tend to be more volatile. By subtracting these categories, core inflation provides a more robust view of the rate of inflation.

Jobs: Consumers are confident, but problems may lie ahead

Of all the metrics tracked by the Forbes Advisor-Ipsos survey, confidence in job security is the highest at 64 out of 100.

Only a quarter of those surveyed said they, a family member or a personal acquaintance had lost their job in the past six months, but expectations for the future are mixed. While 45% said it’s likely someone they know will lose their job in the next six months, 46% said they’re more confident about job security than they were six months ago.

Those who are cautious about future employment prospects might be on to something. An analysis by recruiting technology company Employ found that new monthly job openings are declining in organizations of all sizes and the number of applicants per job is increasing.

More than half of HR professionals (51%) fear layoffs are imminent at their company, and nearly a quarter of companies have reduced hiring or plan to do so in 2022, according to Employ data provided to Forbes Advisor. Jobs in software and technology, financial services and manufacturing have seen the biggest declines in recent months.

Heading into the new year, the job market could depend on how the economy reacts to attempts to contain inflation. The Federal Reserve recently hiked interest rates by 0.5%. That’s down from previous repeated 75 basis point hikes, but some worry that a continuation of increases at this pace could have unintended consequences.

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“If the Fed moves further into a rapid fall in inflation, it could trigger a steeper downturn than the central bank — or the US economy — is ready for,” Rust said.

Survey methodology: Ipsos, which surveyed 941 adults on December 12-13, 2022, made the results exclusively available to Forbes Advisor. The survey is conducted bi-weekly to track consumer sentiment over time, using a series of 11 questions to determine whether consumers feel positively or negatively about the current state of the economy and where it will head in the future.

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