“Consumer confidence fell sharply in April as inflation worries and a downbeat outlook on the job market pushed optimism to its lowest level since 2022.” So starts Josh Schafer’s Yahoo Finance article on 4/30/24. But in 2022 inflation was 6.5% (usinlfationcalculator.com) and the unemployment rate was 3.6% (U.S. Bureau of Labor Statistics). Today inflation is 3.5% and unemployment is 3.4%. So, if inflation is almost half of what it was in ’22 and unemployment is about the same, why is consumer confidence so low?
According to a new paper from a member of the International Monetary Fund and three Harvard professors, including former Treasury Secretary Lawrence Summers, the difference is the cost of money. They argue that the difference between the traditional markers of inflation and unemployment, which economists have relied upon for consumer sentiment assumptions, and the actual consumer confidence number today, is the cost of borrowing money. They argue that as interest rates rise, consumer sentiment dampens, even in the face of low levels of unemployment and stabilizing prices, and the data support their argument. (The Cost of Money is Part of the Cost of Living: New Evidence on the Consumer Sentiment Anomaly Marijn A. Bolhuis et. al., February 2024)
The cost of money, even if one is not looking for financing of any kind, impacts how they feel about the economy. It lends fragility to their outlook, even if one has a good job and earns enough not to be limited by inflationary pressures. This makes sense. With the Federal Reserve increasing interest rates to tame inflation, and stories about rising mortgage rates and increasing credit card defaults in the news, it naturally impacts one’s impression of the overall economy, even if their “personal economy” is doing well.
Most people’s “personal economy” is doing fine. Not only is unemployment down but average hourly earnings are up. Contrary to what is in the media, the truth is that wages are rising at a rate higher than inflation – 4.1% vs 3.4%. (U.S. Bureau of Labor Statistics) The irony here is that rising wages drive inflation as demand increases and prices rise to counter that demand. In other words, persistent wage growth means interest rates are not coming down anytime soon. So, the cost of money is not coming down soon either.
The cost of money is only part of the problem though. It is true that if people “feel” it is harder to get financing for the things they want, even if they are not currently in need of said financing, they tend to cling to the money they have a little tighter. Consulting clients do the same of course. But it is more than that. Business owners speak of the elusive economic downturn they seem to wish for, even as their business is doing well. They stay in their eco-chambers, with one monitor on the business, while a second streams the news they most agree with.
A typical client in need of consulting services is someone who has run their business for as long as they can on craftsmanship alone. It is time to do what they all say they want to do – run their business like a business. What does that really mean? At its core it means to be objective about their business. It means to treat their business like a CEO, rather than someone running a mom-and-pop shop. A CEO runs the business by the numbers. Small to mid-sized consulting clients run their business by how they feel on any given day. In other words, their business runs them. And if, like most of society, they are unable to escape their chosen eco-chamber telling them the sky is falling, that makes our job as the consultant all the harder. Especially since their eco-chamber is typically a political one we dare not broach.
So, what’s a good consultant to do? She must of course lead by example, not allowing her feelings on any given day to impact how she coaches her clients. But there is more to it than just that. As she leads by example, she must catch her clients following her lead, and praise the hell out of them when they do!
Business consultants are not just asking their clients to change how they have behaved for 20, 30 or more years, they are asking them to think differently, to break from those eco-chambers and to start to feed themselves with positive self-talk and hopeful beliefs. they are asking them to make changes, make profits, and be grateful for their successes, even as they do not see themselves being successful. Consultants must be coaches and cheerleaders.
“Concerns over borrowing costs, which have historically tracked the cost of money, are at their highest levels since the Volcker-era.” So writes Summers, et.al. in the aforementioned academic study. Paul Volker was Federal Reserve chair from 1979-1987. In 1979, inflation was 13.3% and the Fed Funds rate was 12%. He orchestrated an aggressive campaign to reign in the skyrocketing inflation of the late 1970’s, when people saw prices increasing on almost everything on almost a daily basis. (investopia.com)
Today’s 3.4% is a far cry from the double-digit inflation Volker was tackling. The idea that anxiety today is at levels of the late 1970’s is insane. It’s the echo chamber clients subscribe to that accounts for such irrational fears.
At the end of the day, the best way to get clients to be more optimistic about the future outlook for their business is to create wins for them and cheer them on to victory. Success breeds confidence. Confidence breeds success.
