From an economic measure, the American consumer reigns supreme. Their dollars spent on goods and services are the key driver of the U.S. economy, accounting for more than two-thirds of all economic activity. But sustainable economic growth requires optimism that conditions in the economy and labor market will remain strong.
The Consumer Confidence Index is a key measure of how we quantify that optimism. Released each month by The Conference Board, a leading economic research institution, the index has a benchmark of 100. Anything above 100 indicates optimism on the economy, jobs and income by consumers who ultimately will spend money and stimulate economic growth.
In July, the index rose 0.3 points to 127.4, reflecting the continuing strength in consumer confidence. This was the 13th consecutive month the index was 120 or higher, a feat not accomplished in more than 18 years. February’s mark of 130 was the highest since December 2000 (132.6).
Robust consumer confidence has fueled the recent surge in economic growth. The latest Gross Domestic Product report shows the U.S. economy grew at an annual rate of 4.1 percent in the second quarter, the fastest pace in nearly four years. GDP is the total dollar-value of goods and services produced in the U.S. and serves as the key indicator on the health of our economy.
In the second quarter, personal consumption expenditures — which tracks household spending on goods and services — rose 4 percent, the fastest pace of growth in three and a half years. Also, business spending remains strong. Nonresidential fixed investment — the big-ticket purchase of factories, equipment and technology — increased by a very solid 7.3 percent.
Despite strength in consumer and business spending, inflation has been kept in relative check by the Federal Reserve. On Tuesday, the Fed’s preferred measure of inflation was reported at 1.9 percent, slightly below its target rate of 2 percent. The Fed deems a 2 percent target rate of inflation, over the long-term, is the ideal healthy balance between price stability and economic growth.
Tasked with ensuring the health of our economy, the Fed has been gradually raising interest rates to keep inflation from surging past its 2 percent target. Since December 2015, the Fed has enacted seven 0.25 percent rate hikes to the benchmark fed funds rate, upon which short-term debt is often based. Higher interest rates equate to higher borrowing costs, which gradually temper consumer and business spending.
The next rate hike is expected in September, the third this year, and the Fed is slightly leaning towards a fourth hike in December. Based on the implied probability calculated off of interest rate futures traded in the open market, the odds of a December rate hike currently lie at 66 percent. But remember, even if the Fed enacts that fourth rate hike in December, it still has three more rate hikes planned for next year.
Faced with rising interest rates, the American consumer has shown tremendous resilience. And as additional rate hikes continue to pile on, Americans’ optimism remains the key for sustained economic growth.