“There’s three things that are never good for a consumer mind set; uncertainty certainly, concern and discordance.” – Mindy Grossman
More than 20,000 Californians are infected with the coronavirus, and the death toll mounts. The human toll is horrendous. And, it looks like it won’t be over soon. As the pandemic rages on amidst directives to protect the public’s health, there have been massive business closures, severe job losses and the implosion of the stock market. So, the erosion of confidence of California consumers in the economy should not come as a surprise to anyone. What is astonishing is that consumers’ faith in the economy has plummeted to a level not seen since the 2008 financial crisis, according to the Chapman-Claremont McKenna College Consumer Sentiment Survey released last week.
Based on responses from those surveyed from March 20 – 27, directly after stay-at-home directives were issued by Governor Newsom, consumers’ confidence in the strength of the economy fell 47%, in comparison to the 4th quarter 2019 California Survey.
According to Cameron Shelton, Director of the Lowe Institute of Political Economy and a professor at Claremont McKenna College, “Usually it takes six to nine months after a recessionary jolt for consumer sentiment to deteriorate this far. Having such a rapid drop in just two weeks is unprecedented.”
The survey indicates that in early March, when the field survey began, respondents were concerned but cautiously optimistic about the economy. As news grew more dire, that sentiment soon nosedived, culminating in the dramatic decline evidenced in the last week of the survey. Overall survey results, when averaged, show a decline in consumer confidence of nearly 15% over the prior quarter. However, that statistic greatly over-estimates where California consumers’ heads are, and the true picture of consumers’ concern can best be dawn from the final days of the survey, says Shelton.
The importance of consumer confidence, which drives buying power, cannot be overstated since consumption accounts for, on the average, 70% of all U.S. economic activity.
The older the age of respondents, the greater the dip in consumer sentiment, the survey establishes. Confidence in the economy of those over 65 years old fell 21%, which likely reflects the impact of the stock market free-fall and the higher COVID-19 morbidity rates. Confidence of those aged 25-34 fell only 6%. And, throughout all regions of the state and across all demographics, respondents who had attained higher education levels were more negative.
Responses to survey questions regarding current business conditions confirm that typically strong labor markets, including Orange County, the Bay Area, Los Angeles and San Diego, are in a world of hurt. The exception is the Inland Empire. Shelton noted that after years of bearing the brunt of most economic downturns, the Inland Empire’s position as a logistics hub is a plus, as delivery of goods is vital. And, Amazon, the Inland Empire’s largest employer, is hiring as domestic e-commence continues to boom.
By contrast, respondents were less pessimistic about family finances and business conditions a year from now, which is a bit of good news amidst the bad.
What next? Anyone’s guess. Will uncertainty ebb to the degree that consumers will open their wallets? Will the stimulus programs out of Washington lift consumer spending in the near term? Will the Federal Reserve Bank’s newly announced programs provide the liquidity businesses need as cash flows out of the system? Will employment growth occur, spurring consumer spending, once the virus is on the skids or will consumers hesitate, worried about a resurgent of the pandemic? Will consumer confidence rebound or will the financial hit and lingering uncertainty lead to prolonged consumer caution?
The answers to those questions are uncertain, at a time when certainty is needed more than ever. Without some level of certainty coming into play, the economy remains at risk, as consumers cut back spending, not knowing what lies ahead.
Billie Greer, among other activities, is a Trustee of the Lowe Institute of Political Economy at Claremont McKenna College. She regularly reports on the Consumer Sentiment Surveys conducted by the Institute quarterly.