Hooray! The Fed’s Survey Says “Consumers Express Continued Optimism”

The Federal Reserve Bank of New York’s Center for Microeconomic Data released the January 2018 Survey of Consumer Expectations on Monday.

According to the Fed, the survey shows “continued improvement in expectations about households’ year-ahead financial situation and credit availability, and robust expected earnings growth. Short- and medium-term inflation expectations fell slightly.“

Consumers expect to make 2% to 3% more next year than they did last year. To the Fed, this qualifies as “continued optimism” even though inflation expectations trend lower.

Inflation Expectations

Robust Earnings Growth

The Fed says consumers expect “robust earnings growth“.

Robust Defined

By my calculation, consumers expect their purchasing power to decline between 3 and 59 basis points depending on whether one measures by the median point expected or the median point predicted.

The Fed might call this robust, but I believe the Fed failed to ask consumers if they agreed with the Fed’s definition.

Spending Projections

Each month, I download the spending projections to produce my own chart.

• The median spending percentile projection declined from 2.89% to 2.85%.
• The 25th percentile projection declined from 0.84% to 0.29%.
• Hooray! the 75th percentile spending projection jumped from 6.47% to 8.08%.

Consumer Sentiment

Downtrends are clear in all of the categories.

Amusingly, the Fed does not believe its own survey. Instead, former Fed Chair Janet Yellen frequently cited the Consumer Conference Board and the University of Michigan surveys as a purveyor of good news for consumer spending.

The Fed would rather extrapolate various feel good measures than pay attention to its own survey.

Inflation Expectations Nonsense

The idea that inflation expectations matter is ridiculous, except in cases of extremely high inflation or hyperinflation.

In Venezuela, people will spend every cent they get as fast as they get it, assuming, of course, that there is anything to buy.

In every other case, consumers’ expectations of where prices will go is meaningless.

No one will buy an extra toaster or coat they do not need. There is only so much food one can store, even with a freezer. A car holds precisely one tank of gas. Consumers will not rent another house or have a second appendectomy just because they expect prices to rise.

Yet, the Fed places great faith in such nonsense.

The Fed may as well ask consumers if the man in the moon looks more like Putin, ZeroHedge, or me. The answer would be equally meaningful.

Mike “Mish” Shedlock